Basel Committee on Banking Supervision
The Basel Committee on Banking Supervision (BCBS) is a committee of banking supervisory authorities that was established by the central bank governors of the Group of Ten countries in 1974.
It provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. The Committee also frames guidelines and standards in different areas - some of the better known among them are the international standards on capital adequacy, the Core Principles for Effective Banking Supervision and the Concordat on cross-border banking supervision.
The Committee's members come from Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, India,Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden,Switzerland, Turkey, the United Kingdom and the United States.
The Committee's Secretariat is located at the Bank for International Settlements (BIS) in Basel, Switzerland. However, the BIS and the Basel Committee remain two distinct entities.
The Basel Committee formulates broad supervisory standards and guidelines and recommends statements of best practice in banking supervision (see bank regulation or "Basel III Accord", for example) in the expectation that member authorities and other nations' authorities will take steps to implement them through their own national systems, whether in statutory form or otherwise.
The purpose of BCBS is to encourage convergence toward common approaches and standards. The Committee is not a classical multilateral organization, in part because it has no founding treaty. BCBS does not issue binding regulation; rather, it functions as an informal forum in which policy solutions and standards are developed.
The Committee is further sub-divided each of which have specific task forces to work on specific implementation issues:
The Standards Implementation Group (SIG)
- Operational Risk Subgroup - addresses issues related to Advanced Measurement Approach for Operational Risk
- Task Force on Colleges - develops guidance on the Basel Committee's work on supervisory colleges
- Task Force on Renumeration - promotes the adoption of sound renumeration practices
- Standards Monitoring Procedures Task Force - develops procedures to achieve greater effectiveness and consistency in standards monitoring and implementation
The Policy Development Group (PDG)
- Risk Management and Modelling Group - point of contact with the industry on the latest advances in risk measurement and management
- Research Task Force - facilitates economists from member institutions to discuss research on financial stability in consultation with the academic sector
- Trading Book Group - reviews how risks in the trading book should be captured by regulatory capital
- Working Group on Liquidity - works on global standards for liquidity risk management and regulation
- Definition of Capital Subgroup - reviews eligible capital instruments
- Capital Monitoring Group - co-ordinates the expertise of national supervisor in monitoring capital requirements
- Cross-border Bank Resolution Group - compares the national policies, legal frameworks and the allocation of responsibilities for the resolution of banks with significant cross-border operations
The Accounting Task Force (ATF) - ensures that accounting and auditing standards help promote sound risk management thereby maintaining the safety and soundness of the banking system
- Audit subgroup - explores key audit issues and co-ordinates with other bodies to promote standards
The Basel Consultative Group (BCG) - facilitates engagement between banking supervisors including dialogue with non-member countries
The present Chairman of the Committee is Stefan Ingves, Governor of the central bank of Sweden (Sveriges Riksbank).
The Basel committee along with its sister organizations, the International Organization of Securities Commissions and International Association of Insurance Supervisors together make up the Joint Forum of international financial regulators.
The Tower of Basel: Secretive Plans for the Issuing of a Global Currency
Do we really want the Bank for International Settlements (BIS) issuing our global currency
By Ellen Brown
Global Research, April 17, 2013
Global Research 18 April 2009
his carefully research article by Ellen Brown was first published in April 2009. It sheds light on the current crisis of the World monetary system. (GR ed. M. Ch.)
In an April 7  article in The London Telegraph titled “The G20 Moves the World a Step Closer to a Global Currency,” Ambrose Evans-Pritchard wrote:
“A single clause in Point 19 of the communiqué issued by the G20 leaders amounts to revolution in the global financial order.“‘We have agreed to support a general SDR allocation which will inject $250bn (£170bn) into the world economy and increase global liquidity,’ it said. SDRs are Special Drawing Rights, a synthetic paper currency issued by the International Monetary Fund that has lain dormant for half a century.“In effect, the G20 leaders have activated the IMF’s power to create money and begin global ‘quantitative easing’. In doing so, they are putting a de facto world currency into play. It is outside the control of any sovereign body. Conspiracy theorists will love it.”Indeed they will. The article is subtitled, “The world is a step closer to a global currency, backed by a global central bank, running monetary policy for all humanity.” Which naturally raises the question, who or what will serve as this global central bank, cloaked with the power to issue the global currency and police monetary policy for all humanity? When the world’s central bankers met in Washington last September, they discussed what body might be in a position to serve in that awesome and fearful role. A former governor of the Bank of England stated:“[T]he answer might already be staring us in the face, in the form of the Bank for International Settlements (BIS). . . . The IMF tends to couch its warnings about economic problems in very diplomatic language, but the BIS is more independent and much better placed to deal with this if it is given the power to do so.”1And if the vision of a global currency outside government control does not set off conspiracy theorists, putting the BIS in charge of it surely will. The BIS has been scandal-ridden ever since it was branded with pro-Nazi leanings in the 1930s. Founded in Basel, Switzerland, in 1930, the BIS has been called “the most exclusive, secretive, and powerful supranational club in the world.” Charles Higham wrote in his book Trading with the Enemy that by the late 1930s, the BIS had assumed an openly pro-Nazi bias, a theme that was expanded on in a BBC Timewatch film titled “Banking with Hitler” broadcast in 1998.2 In 1944, the American government backed a resolution at the Bretton-Woods Conference calling for the liquidation of the BIS, following Czech accusations that it was laundering gold stolen by the Nazis from occupied Europe; but the central bankers succeeded in quietly snuffing out the American resolution.3
In Tragedy and Hope: A History of the World in Our Time (1966), Dr. Carroll Quigley revealed the key role played in global finance by the BIS behind the scenes. Dr. Quigley was Professor of History at Georgetown University, where he was President Bill Clinton’s mentor. He was also an insider, groomed by the powerful clique he called “the international bankers.” His credibility is heightened by the fact that he actually espoused their goals. He wrote:
“I know of the operations of this network because I have studied it for twenty years and was permitted for two years, in the early 1960′s, to examine its papers and secret records. I have no aversion to it or to most of its aims and have, for much of my life, been close to it and to many of its instruments. . . . [I]n general my chief difference of opinion is that it wishes to remain unknown, and I believe its role in history is significant enough to be known.”Quigley wrote of this international banking network:
“[T]he powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences. The apex of the system was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world’s central banks which were themselves private corporations.”The key to their success, said Quigley, was that the international bankers would control and manipulate the money system of a nation while letting it appear to be controlled by the government. The statement echoed one made in the eighteenth century by the patriarch of what would become the most powerful banking dynasty in the world. Mayer Amschel Bauer Rothschild famously said in 1791:
“Allow me to issue and control a nation’s currency, and I care not who makes its laws.”
Mayer’s five sons were sent to the major capitals of Europe – London, Paris, Vienna, Berlin and Naples – with the mission of establishing a banking system that would be outside government control. The economic and political systems of nations would be controlled not by citizens but by bankers, for the benefit of bankers. Eventually, a privately-owned “central bank” was established in nearly every country; and this central banking system has now gained control over the economies of the world. Central banks have the authority to print money in their respective countries, and it is from these banks that governments must borrow money to pay their debts and fund their operations. The result is a global economy in which not only industry but government itself runs on “credit” (or debt) created by a banking monopoly headed by a network of private central banks; and at the top of this network is the BIS, the “central bank of central banks” in Basel.
Behind the Curtain
For many years the BIS kept a very low profile, operating behind the scenes in an abandoned hotel. It was here that decisions were reached to devalue or defend currencies, fix the price of gold, regulate offshore banking, and raise or lower short-term interest rates. In 1977, however, the BIS gave up its anonymity in exchange for more efficient headquarters. The new building has been described as “an eighteen story-high circular skyscraper that rises above the medieval city like some misplaced nuclear reactor.” It quickly became known as the “Tower of Basel.” Today the BIS has governmental immunity, pays no taxes, and has its own private police force.4 It is, as Mayer Rothschild envisioned, above the law.
The BIS is now composed of 55 member nations, but the club that meets regularly in Basel is a much smaller group; and even within it, there is a hierarchy. In a 1983 article in Harper’s Magazine called “Ruling the World of Money,” Edward Jay Epstein wrote that where the real business gets done is in “a sort of inner club made up of the half dozen or so powerful central bankers who find themselves more or less in the same monetary boat” – those from Germany, the United States, Switzerland, Italy, Japan and England.
“The prime value, which also seems to demarcate the inner club from the rest of the BIS members, is the firm belief that central banks should act independently of their home governments. . . . A second and closely related belief of the inner club is that politicians should not be trusted to decide the fate of the international monetary system.”
In 1974, the Basel Committee on Banking Supervision was created by the central bank Governors of the Group of Ten nations (now expanded to twenty). The BIS provides the twelve-member Secretariat for the Committee. The Committee, in turn, sets the rules for banking globally, including capital requirements and reserve controls. In a 2003 article titled “The Bank for International Settlements Calls for Global Currency,” Joan Veon wrote:
“The BIS is where all of the world’s central banks meet to analyze the global economy and determine what course of action they will take next to put more money in their pockets, since they control the amount of money in circulation and how much interest they are going to charge governments and banks for borrowing from them. . . .“When you understand that the BIS pulls the strings of the world’s monetary system, you then understand that they have the ability to create a financial boom or bust in a country. If that country is not doing what the money lenders want, then all they have to do is sell its currency.”5
The Controversial Basel Accords
The power of the BIS to make or break economies was demonstrated in 1988, when it issued a Basel Accord raising bank capital requirements from 6% to 8%. By then, Japan had emerged as the world’s largest creditor; but Japan’s banks were less well capitalized than other major international banks. Raising the capital requirement forced them to cut back on lending, creating a recession in Japan like that suffered in the U.S. today. Property prices fell and loans went into default as the security for them shriveled up. A downward spiral followed, ending with the total bankruptcy of the banks. The banks had to be nationalized, although that word was not used in order to avoid criticism.6
Among other collateral damage produced by the Basel Accords was a spate of suicides among Indian farmers unable to get loans. The BIS capital adequacy standards required loans to private borrowers to be “risk-weighted,” with the degree of risk determined by private rating agencies; and farmers and small business owners could not afford the agencies’ fees. Banks therefore assigned 100 percent risk to the loans, and then resisted extending credit to these “high-risk” borrowers because more capital was required to cover the loans. When the conscience of the nation was aroused by the Indian suicides, the government, lamenting the neglect of farmers by commercial banks, established a policy of ending the “financial exclusion” of the weak; but this step had little real effect on lending practices, due largely to the strictures imposed by the BIS from abroad.7
Similar complaints have come from Korea. An article in the December 12, 2008 Korea Times titled “BIS Calls Trigger Vicious Cycle” described how Korean entrepreneurs with good collateral cannot get operational loans from Korean banks, at a time when the economic downturn requires increased investment and easier credit:
“‘The Bank of Korea has provided more than 35 trillion won to banks since September when the global financial crisis went full throttle,’ said a Seoul analyst, who declined to be named. ‘But the effect is not seen at all with the banks keeping the liquidity in their safes. They simply don’t lend and one of the biggest reasons is to keep the BIS ratio high enough to survive,’ he said. . . .
“Chang Ha-joon, an economics professor at Cambridge University, concurs with the analyst. ‘What banks do for their own interests, or to improve the BIS ratio, is against the interests of the whole society. This is a bad idea,’ Chang said in a recent telephone interview with Korea Times.”
In a May 2002 article in The Asia Times titled “Global Economy: The BIS vs. National Banks,” economist Henry C K Liu observed that the Basel Accords have forced national banking systems “to march to the same tune, designed to serve the needs of highly sophisticated global financial markets, regardless of the developmental needs of their national economies.” He wrote:
“[N]ational banking systems are suddenly thrown into the rigid arms of the Basel Capital Accord sponsored by the Bank of International Settlement (BIS), or to face the penalty of usurious risk premium in securing international interbank loans. . . . National policies suddenly are subjected to profit incentives of private financial institutions, all members of a hierarchical system controlled and directed from the money center banks in New York. The result is to force national banking systems to privatize . . . .“BIS regulations serve only the single purpose of strengthening the international private banking system, even at the peril of national economies. . . . The IMF and the international banks regulated by the BIS are a team: the international banks lend recklessly to borrowers in emerging economies to create a foreign currency debt crisis, the IMF arrives as a carrier of monetary virus in the name of sound monetary policy, then the international banks come as vulture investors in the name of financial rescue to acquire national banks deemed capital inadequate and insolvent by the BIS.”Ironically, noted Liu, developing countries with their own natural resources did not actually need the foreign investment that trapped them in debt to outsiders:
“Applying the State Theory of Money [which assumes that a sovereign nation has the power to issue its own money], any government can fund with its own currency all its domestic developmental needs to maintain full employment without inflation.”
When governments fall into the trap of accepting loans in foreign currencies, however, they become “debtor nations” subject to IMF and BIS regulation. They are forced to divert their production to exports, just to earn the foreign currency necessary to pay the interest on their loans. National banks deemed “capital inadequate” have to deal with strictures comparable to the “conditionalities” imposed by the IMF on debtor nations: “escalating capital requirement, loan writeoffs and liquidation, and restructuring through selloffs, layoffs, downsizing, cost-cutting and freeze on capital spending.” Liu wrote:
“Reversing the logic that a sound banking system should lead to full employment and developmental growth, BIS regulations demand high unemployment and developmental degradation in national economies as the fair price for a sound global private banking system.”
The Last Domino to Fall
While banks in developing nations were being penalized for falling short of the BIS capital requirements, large international banks managed to escape the rules, although they actually carried enormous risk because of their derivative exposure. The mega-banks succeeded in avoiding the Basel rules by separating the “risk” of default out from the loans and selling it off to investors, using a form of derivative known as “credit default swaps.”
However, it was not in the game plan that U.S. banks should escape the BIS net. When they managed to sidestep the first Basel Accord, a second set of rules was imposed known as Basel II. The new rules were established in 2004, but they were not levied on U.S. banks until November 2007, the month after the Dow passed 14,000 to reach its all-time high. It has been all downhill from there. Basel II had the same effect on U.S. banks that Basel I had on Japanese banks: they have been struggling ever since to survive.8
Basel II requires banks to adjust the value of their marketable securities to the “market price” of the security, a rule called “mark to market.”9 The rule has theoretical merit, but the problem is timing: it was imposed ex post facto, after the banks already had the hard-to-market assets on their books. Lenders that had been considered sufficiently well capitalized to make new loans suddenly found they were insolvent. At least, they would have been insolvent if they had tried to sell their assets, an assumption required by the new rule. Financial analyst John Berlau complained:
“The crisis is often called a ‘market failure,’ and the term ‘mark-to-market’ seems to reinforce that. But the mark-to-market rules are profoundly anti-market and hinder the free-market function of price discovery. . . . In this case, the accounting rules fail to allow the market players to hold on to an asset if they don’t like what the market is currently fetching, an important market action that affects price discovery in areas from agriculture to antiques.”10Imposing the mark-to-market rule on U.S. banks caused an instant credit freeze, which proceeded to take down the economies not only of the U.S. but of countries worldwide. In early April 2009, the mark-to-market rule was finally softened by the U.S. Financial Accounting Standards Board (FASB); but critics said the modification did not go far enough, and it was done in response to pressure from politicians and bankers, not out of any fundamental change of heart or policies by the BIS.
And that is where the conspiracy theorists come in.
- Why did the BIS not retract or at least modify Basel II after seeing the devastation it had caused?
- Why did it sit idly by as the global economy came crashing down?
- Was the goal to create so much economic havoc that the world would rush with relief into the waiting arms of the BIS with its privately-created global currency? The plot thickens . . . .
Ellen Brown developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest book, she turns those skills to an analysis of the Federal Reserve and “the money trust.” She shows how this private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her earlier books focused on the pharmaceutical cartel that gets its power from “the money trust.” Her eleven books include Forbidden Medicine, Nature’s Pharmacy (co-authored with Dr. Lynne Walker), and The Key to Ultimate Health (co-authored with Dr. Richard Hansen). Her websites are www.webofdebt.com and www.ellenbrown.com.
1. Andrew Marshall, “The Financial New World Order: Towards a Global Currency and World Government,” Global Research (April 6, 2009).2 Alfred Mendez, “The Network,” The World Central Bank: The Bank for International Settlements,http://copy_bilderberg.tripod.com/bis.htm.3 “BIS – Bank of International Settlement: The Mother of All Central Banks,” hubpages.com (2009).4 Ibid.5 Joan Veon, “The Bank for International Settlements Calls for Global Currency,” News with Views (August 26, 2003).6 Peter Myers, “The 1988 Basle Accord – Destroyer of Japan’s Finance System,”http://www.mailstar.net/basle.html (updated September 9, 2008).7 Nirmal Chandra, “Is Inclusive Growth Feasible in Neoliberal India?”, www.networkideas.org (September 2008).8 Bruce Wiseman, “The Financial Crisis: A look Behind the Wizard’s Curtain,” Canada Free Press (March 19, 2009).9 See Ellen Brown, “Credit Where Credit Is Due,” www.webofdebt.com/articles/creditcrunch.php (January 11, 2009).10 John Berlau, “The International Mark-to-market Contagion,” OpenMarket.org (October 10, 2008).
May 09, 2013
The Basel Committee and the Global Banking MafiaGlobal Research
The Basel Committee on Banking Supervision (hereinafter – the Committee) is closely associated with supranational organisations like the Bank for International Settlements in Basel (BIS), which is often called the «club», the «headquarters» of central banks or the «Central Bank of Last Resort». The Committee’s office is situated in the BIS building. At the end of 1974, following the disequilibrium of international currencies and banking markets caused by the collapse of the Herstatt Bank in West Germany, the heads of central banks in the G10 countries established the Committee under the auspices of the BIS to develop common international rules with regard to banking supervision. The Committee formulates common standards for banking supervision and recommendations for their implementation, on the assumption that national authorised bodies (first and foremost central banks) will push them forwards in their own countries. With regard to G10, this is the group of countries that signed a general agreement on borrowing with the IMF in 1962 (Belgium, Great Britain, West Germany, Italy, Canada, the Netherlands, France, Sweden, the USA and Japan). Switzerland, which was not a member of the IMF, joined in 1964, but the name of the group remained as before. Representatives from Luxembourg were also included in the Basel Committee from the very beginning and, from 2001, the Committee has included representatives from Spain. At present, the Committee includes representatives from central banks and national authorities on banking supervision from 27 countries (the 13 countries already mentioned along with Argentina, Australia, Brazil, China, Hong Kong, India, Indonesia, Korea, Mexico, Russia, Saudi Arabia, Singapore, South Africa and Turkey, which all joined the Committee in 2009). Over almost four decades of its activities, the Committee has published tens of documents on different areas of activity, including general issues on the organisation of supervision, capital adequacy, all kinds of risk, the corporate governance of lending and borrowing organisations and so on.
The Committee’s key area of activity is the definition of standards on capital adequacy for banks.
All of the Committee’s documentation is centred around an incredibly simple ratio: equity : a bank’s capital = capital adequacy ratio.
Kabbalists of the money world are looking for this ratio’s magic number, which would guarantee the stability of the banking system. In fact, the Committee is seeking to legitimise what is a crime. In Europe, a system of so-called partial, or incomplete, coverage of obligations by banks as borrowing and lending organisations has already existed for a long time (at least since the 18th century). Figuratively speaking, this system allows banks to make money «out of thin air».
For example, for every 1 dollar of lawful money that depositors place in a deposit account, banks are allowed to release 5 or 10 dollars of non-cash (credit) money by way of credit. This used to be called counterfeiting and was strictly punishable by law. Nowadays, it is called the «norm» or «principle» of banking, legalised by national laws, and in economic textbooks it is known as the «money multiplier». The principle of «partial» coverage (reservation) is «protected» by a supranational structure called the «Basel Committee on Banking Supervision», which lends the principle an appearance of respectability.
No cunning standards and formulae will remove the main effect of the «partial» coverage (reservation) of obligations – the banking crises. In the almost four decades that the Committee has existed, the world has been witness to a countless number of banking failures and crises. In order to prevent such problems, obligations need to be covered 100 percent, but then banks would be deprived of the opportunity to engage in their own «financial alchemy». There is a strict taboo on the honest and frank discussion of «partial» reservation both in central banks and the Committee: they are trying to convince the public that it is possible to invent a «magical formula» for capital adequacy so that banks can continue to make money «out of thin air» as before. This is outright deception.
Basel I and Basel II – straws for the drowningUp to the end of 2012, two fundamental documents had been implemented by the Committee that defined the «magical formula» for capital adequacy and recommended that this formula be used by national authorities on banking supervision – Basel I and Basel II. The first of these came into existence in 1988 and had the very respectable name of the «International Convergence of Capital Measurement and Capital Standards» (Basel I). This agreement defined the minimum capital adequacy ratio as 8 percent, calculated as the ratio of equity (regulated by the supervisory authority) to risk weighted assets. Only credit risks are taken into account (although a bank’s capital can be made up of investments as well as credits). In fact, the Committee gave the go-ahead for a financial-monetary orgy, respectfully called «the development of monetary and financial markets» in economic textbooks. The markets began to «blister», the «blisters» began to burst and the real economy and ordinary people suffered the most. To date, more than 100 countries in the world adhere to the rules of Basel I, according to the official declaration.
At the turn of the century, a new version of the standard began to be prepared called Basel II, which was to start in 2004. The new version contained extremely feeble attempts to take account of new banking risks (besides credit risks), especially in view of the rapid development of derivatives markets, the emergence of hedge funds and other institutional speculators, with which banks were extremely closely linked. At the height of implementing the new standard, the financial crisis of 2007-2009 broke out. It once again demonstrated that the Basel standards are no more than a fig leaf covering the tyranny of the world’s usurers. Basel II was unable to cure the world’s moneylenders of their greed, the global banking giant Lehman Brothers sank to the depths in front of everybody’s eyes and, in order to save others, America was forced to spend upwards of three trillion dollars from the public purse, with Europe spending about the same. There were even attempts to prove that it was the implementation of Basel II that had caused the start of the financial crisis, since in order to make up for the lack of equity, banks decided to use extremely risky methods to attract capital and had to go as far as falsification and outright deception (accounting offences, the use of off-balance sheet transactions, etc.). During the financial crisis, the Committee began to spasmodically introduce changes and amendments to the Basel II standard.
The features of Basel IIIAt long last, a new document emerged called Basel III. Proposals for Basel III were approved at the G20 Summit in Seoul in November 2010. Participants at the Summit also approved the timeline for the phased implementation of the standard. 1 January 2013 was given as the start date. The new document is exceedingly complex and voluminous, numbering nearly 800 pages. I would like to draw your attention to the following features:1. The timeline for implementing the standard stretches to 2018; in other words, the standard is not «strict», it gives banks enough time for manoeuvre;2. The bar for the capital adequacy ratio of banks was raised, but not so much that it would avoid new crises;3. The role of the «human factor» in the assessment of banks by supervisory authorities was increased; and4. Within equity, a special role has been given to gold as a financial asset.In my opinion, the last feature is the most important; it is a high-quality innovation that distinguishes Basel III from Basel II.
In previous Basel standards, only cash (which comes under the heading of «legal tender» in all countries) and government debt securities – Ministry of Finance and Treasury bonds – were regarded as high-quality equity.
Moreover, this did not include all bonds, only those given the highest rating by leading international rating agencies. For a long time, the highest quality form of equity was considered to be US Treasury bonds. In other words, the banks in those countries that took part in Basel I and Basel II must have been helping Uncle Sam by purchasing US bonds and covering up the holes in the US budget, thereby supporting the US dollar and working against gold as the main rival to «green paper».
«Basel III»: the partial rehabilitation of goldBefore the 1970s, when the Bretton-Woods currency system existed in the world and there were not yet any «Basel» standards, everything was different. Banks were principally valued in terms of the amount of gold in their equity. The more gold there was relative to the total amount of capital and the total amount of assets, the safer the bank was believed to be. It was all simple, clear and logical. However, those good old times came to an end with the collapse of the gold standard and the IMF’s decision to carry out a full and final demonetisation of gold. Gold was demoted to a run-of-the-mill exchange commodity like oil, wheat or coffee. As a last resort, banks could use gold as an investment medium, but the metal stopped being regarded as a valuable financial asset.
Up to now, the Bank for International Settlements (BIS) has stored the gold in its «black body», so to speak. On the whole, the rules of the game were such that there was no benefit in banks hoarding their gold. At best, bankers regarded the yellow metal with the eyes of speculators buying and selling gold to make short-term profits.
Basel III has raised the status of gold dramatically. New rules have been provided to transfer gold to a bank’s tier 1 capital at 100 percent of its value. Banks now have the opportunity to replace their paper assets (primarily US Treasury bonds) with gold. Experts have calculated that such a practice will create additional demand for the precious metal to the extent of at least 1700 tonnes. There have been even higher estimations of up to 3000 tonnes.
A number of experts believe that the development of Basel III was carried out with powerful lobbying from the Rothschilds, who have an interest in restoring the monetary status of gold in the world. For the last two centuries, the Rothschilds have had control over the main gold reserves, been involved in the extraction of gold and are «market makers» in the precious metals market. In September 2012, before the Basel Committee’s new standard had even come into force, the heads of one of the world’s largest banks, Deutsche Bank AG, which falls within the Rothschilds’ sphere of influence, made a public statement that gold had again been transformed from a commodity into money. The statement caused a painful reaction on the other side of the Atlantic Ocean, first and foremost in the US Federal Reserve System. The chairman of the Federal Reserve, Ben Bernanke, once again issued a standard statement that gold was far from the best type of money.
It is not difficult to see that Basel III is a blow to the US dollar and the American economy. America’s reaction was sufficiently prompt and harsh. At the end of last year, America’s monetary and financial regulators (the Federal Reserve system, the Deposit Insurance Agency and the Office of the Comptroller of Currency) reported that they had been sent a petition by leading American banks stating that the new Basel standards were crippling for lending and borrowing organisations. After this, the Federal Reserve System and other US financial regulators went to the Committee and announced that the introduction of Basel III in America was being postponed, and no date for transition to the new standard was given. At this point, European banks started to feel anxious, believing that if they began the transition to the new standard, they would find themselves uncompetitive in comparison with American banks. Therefore, they also refused to shift to Basel -III.
So who exactly has embraced Basel III since 1 January 2013? The list is not very long, with a total of 11 countries in all: Australia, Hong Kong, Canada, China, Mexico, Saudi Arabia, Singapore, Thailand, Switzerland, South Africa and Japan. It is also possible to add India here, which announced it would be joining Basel III from 1 April 2013. It is remarkable that the list contains just four countries from the «golden billion» zone: Australia, Canada, Switzerland and Japan.
Turkey’s absence from the list is mysterious. The country actively encourages the wide use of gold in banking operations, and the proportion of gold in the equity and assets of Turkey’s banks compared with other countries is high. In reality, the Turkish banking sector is completely ready to implement the Basel III standards. As the London newspaper the Financial Times observed, the policy of the governor of the Central Bank of Turkey, Erdem Başçı, has yielded impressive results for Turkish banks: they have attracted 8.3 billion US dollars in new deposits through gold programmes over the last 12 months and are now able to channel these resources into lending.
One can observe that nearly all the leading gold producers are on the list given above: China, South Africa, Canada and Australia. A number of the countries on the list are leading importers of gold (China, Hong Kong, Switzerland, Saudi Arabia and India). China, which has been included on the list of «golden» leaders, has long been hinting at the possibility of transforming the Yuan into a gold standard. Switzerland, meanwhile, is pushing forward a project to introduce a parallel currency within the country in the form of a gold franc.
«Basel III»: banks’ U-turn on goldThe implementation of the new Basel rules could lead to a radical change in the positions of individual countries’ banks in the global financial system. To begin with, it is expected that the positions of Chinese banks will become stronger, bearing in mind that for several years in succession, China has ranked first in the world in terms of the volume of gold both extracted and imported. The positions of those banks that bravely embraced Basel III will also become stronger, since the price of gold over the last 12 years has shown an unprecedentedly high growth rate – an average of 17 percent per year. In 2012, a troy ounce of gold cost 1700 dollars. According to many gold traders, meanwhile, the «fair» («equilibrium») value of metal is at a level of no less than 5000 dollars. Whoever managed to get on the «gold train» by buying low-cost tickets will be much more likely to find themselves on the global financial Olympus tomorrow.
Even those banks that have still not entered the zone of Basel III activities understand that their future depends on how quickly they will be able to turn towards gold. IMF and World Gold Council statistics do not give a clear picture of gold purchases by the entire banking sector.
However, there are statistics for the purchase and sale activities of central banks in the gold market. Following the collapse of the Bretton-Woods currency system, central banks across the world sold more gold than they bought for more than three decades.
After the recently concluded financial crisis, the situation changed dramatically. In 2011, net purchases of gold by the world’s central banks amounted to 457 tonnes. This is more than 10 percent of the total demand for precious metals on the world market (4400 tonnes). During the 15 years preceding the crisis, meanwhile, net purchases totalled an average of 400 tonnes per year. Thus, the central banks made a sharp about turn and started to purchase gold in the kinds of volumes that had not been observed since the 1960s. Last year was a record year in terms of the amount of net purchases of gold by the world’s central banks since 1964. According to preliminary data released by the World Gold Council, a new record will also be set in 2012: the net purchase of gold by the world’s central banks rose to 536 tonnes.
With regard to commercial banks, before the introduction of the Basel III standard they only saw gold as a way to increase their own profits through speculation and/or investment, but they had no incentive to establish their own considerable reserves of precious metals. I think their attitude to gold is going to change in 2013, they will buy it for themselves with a view to improving the sustainability of their business and attracting clients.
The validation of the Basel III standards in a number of countries in 2013 is a serious indication that gold has returned to the world of money. We are not yet talking about the classical gold standard, of course, whereby banks are able to freely exchange paper money for metal. But metal may become more widely used to cover banks’ liabilities and be a financial asset of the «highest authority». Who knows, maybe in the future, when banks have accumulated enough gold, the issue of the reinstatement of the gold standard will be put back on the agenda…
10 May 2013
Banks push alternative to Basel Committee securitisation modelAuthor: Laurie Carver
Basel proposals would kill European market, banks warn – and some regulators sympathise
Fears that proposed new capital rules will kill off the European securitisation market – just as policy-makers are calling for it to be revived – have spurred banks to draw up an alternative approach that is now being pitched to regulators. Recent weeks have seen meetings with supervisors in France, the Netherlands, Switzerland and the UK, as well as a presentation to the securitisation working group at the Basel Committee on Banking Supervision, which drew up the draft rules.Related articles"We're concerned they're trying to raise capital against securitisations in a very broad one-size-fits-all approach, as if it's an asset class rather than a financing method that can be used for different types of risks. If adopted, these prohibitively excessive capital rules will curtail the use of securitisation – ironically just when policy-makers are endorsing it as a tool for promoting growth," says Jim Ahern, global head of securitisation at Société Générale Corporate & Investment Banking.
Mario Draghi, president of the European Central Bank (ECB), used a press conference on May 2 to announce the central bank is exploring ways to revive securitisation. Draghi highlighted the "regulatory situation" as one of the problems facing the market.
The fear is that the Basel approach will kill the securitisation market in EuropeThe proposals – published in December last year – relate specifically to securitised instruments held in the banking book, and spurred a wave of protest in the comment period that ended on March 15. Banks and industry associations argued the capital generated by a pool of securitised assets would be higher than that required if holding the assets themselves – a particular problem for Europe's market, which is heavily dependent on bank investors, in contrast to the US.
"The fear is that the Basel approach will kill the securitisation market in Europe. If it costs an order of magnitude more in capital to securitise rather than holding the underlying assets, then it takes away the point altogether. It's completely contradictory to policies trying to stimulate the market. We don't yet know the impact the counterproposal would have but it seems to match up better with the treatment of the underlying. It's good there's an alternative," says a senior figure at a large European bank.
The counterproposal – available via a link at the end of this article – draws on input from a number of large dealers, but was authored by Georges Duponcheele, head of private-side banking solutions at BNP Paribas in London, and Daniel Totouom-Tangho, a credit quant at the bank, together with William Perraudin, adjunct professor at Imperial College London and director of consulting firm Risk Control.
It is believed to have been presented to members of the Basel Committee's working group on securitisation at a meeting of the Global Financial Markets Association on April 23. Further one-on-one meetings with Japanese, German, Spanish and Italian regulators are planned.
So far, regulators who have seen the proposal are giving nothing away. "I have seen it, yes, but it is too soon to comment," says one North American regulator close to the committee process. However, some European regulators are concerned the Basel Committee proposal is essentially an attempt to prevent a revival of the US subprime mortgage securitisations that helped trigger the financial crisis, and that applying the same rules to deals involving simpler, safer assets would shut down a potentially important engine of credit growth.
"The Basel Committee's proposal is an ineffective approach. Frankly, it came from our American colleagues, and when they issued these proposals it was not just the industry but also the central banks and regulators that were a bit shocked by the increase in capital charges," says one European regulator close to the working group.
The industry's alternative proposal differs in several ways from the Basel Committee's modified supervisory formula approach (MSFA), including its choice of risk measure – marginal value-at-risk rather than the more conservative expected shortfall – and asset dynamics, where a two-factor Pykhtin-Dev model is preferred to the Basel Committee's one-factor model. The MSFA also incorporates capital add-ons for model risk.
The aim was to develop a model that would be capital-neutral – meaning the capital required to hold all tranches of a given deal would be the same as that required to hold the pool of underlying assets separately. It took shape after bankers testing the MSFA discovered it would magnify capital requirements for a pool of good-quality home loans.
"When the MSFA paper came out, we were working on an absolutely vanilla deal, so I put the formula into my model. It tripled the capital of the unsecuritised pool, and my initial reaction was that something must be wrong with my coding – it didn't occur to me that this would be the intent of the formula. I only realised the truth once the team had checked my spreadsheet," says BNP Paribas's Duponcheele.
"The MSFA is inconsistent with the underlying internal ratings-based methodology in a bunch of ways. It's one thing to have add-ons for model risk, but you need to have neutrality at a basic level and the MSFA doesn't. So we tried to work out an approach that would," says Imperial College's Perraudin.
10 May 2013Risk will publish an in-depth article on the securitisation capital proposals later this month.
Australia: APRA sets a high water mark for implementing Basel III liquidity reformsArticle by Louise McCoach
On 6 May 2013 the Australian Prudential Regulation Authority (APRA) released a second consultation package outlining updates to its proposals to implement the Basel III liquidity reforms for authorised deposit-taking institutions (ADIs) in Australia.
The package, comprising a discussion paper, a revised draft Prudential Standard APS 210 Liquidity (APS 210) and a draft Prudential Practice Guide APG 210 Liquidity, addresses several of the issues raised in submissions on APRA's previous discussion paper released in November 2011.
The 2011 discussion paper outlined APRA's proposals for the implementation of the Basel III liquidity standards in Australia, including the introduction of the 30 day Liquidity Coverage Ratio (LCR), which accounts for an acute stress scenario, and the Net Stable Funding Ratio (NSFR) to encourage longer-term funding resilience. The consultation package maintains these measures in the updated draft APS 210 subject to some adjustments to the cash flow assumptions, as outlined below.
It also incorporates revisions to draft APS 210 to reflect updates to the Basel III liquidity reforms published by the Basel Committee on Banking Supervision in January 2013.
This article considers APRA's response to the Basel III liquidity reforms and other issues raised following APRA's previous discussion paper.
APRA's response to updates to the Basel III Liquidity ReformsThe second consultation package canvasses a number of issues, including the extent to which APRA will implement recent adjustments by the Basel Committee to the LCR, including the broadening of the definition of high-quality liquid assets (HQLA) to encompass a wider range of assets (such as equities and high quality residential mortgage backed securities), amendments to the net cash outflow assumptions in calculating the LCR and allowing a phase-in period for the introduction of the LCR. APRA's response to these Basel III level adjustments is discussed below.LCR implementation timetableUnder the new Basel III phase-in arrangements, the LCR will be introduced as scheduled on 1 January 2015, but the minimum requirement will begin at 60%, rising in equal annual steps of 10percentage points to reach 100% on 1January 2019. This graduated approach is designed to ensure that the LCR can be introduced without disrupting the orderly strengthening of banking systems or the ongoing financing of economic activity. It is not clear whether the changes to the LCR timetable will lead to the Basel Committee announcing a corresponding phase-in for the NSFR.Notwithstanding the new Basel III phase in arrangements, APRA is proposing to implement the liquidity reforms on its previously published timetable. The LCR will therefore become effective in Australia as of 1 January 2015 with no phase-in and the NSFR from 1 January 2018.
High quality liquid assets (HQLA)The changes to the LCR announced in the Basel III liquidity reforms included a discretion for national authorities to widen the range of liquid assets in the definition of high quality liquid assets (HQLA). Under the Basel Committee's original measures, HQLAs were categorised according to the liquidity characteristics of the assets. APRA characterised these as HQLA1 and HQLA2.Following a review of the marketable instruments denominated in Australian dollars, APRA previously advised that the only assets that qualified for HQLA1 were cash, balances held with the RBA, and Commonwealth Government and semi-government securities and moreover, that there were no assets that qualified as HQLA2. This approach was confirmed in the updated draft APS 210.The Basel Committee has since introduced a third level of HQLA assets, known as Level 2B assets, which regulators have a discretion to allow banks in their jurisdiction to count towards their LCR calculations. These are: RMBS rated AA or higher not issued by the bank itself or any of its affiliate entities; corporate debt securities rated between A+ and BBB- not issued by a financial institution or any of its affiliate entities; or ordinary shares not issued by a financial institution or any of its affiliate entities.APRA has opted not to recognise any Level 2B assets and so the definition of HQLA in the updated draft APS 210 remains unchanged.At the same time, APRA has indirectly recognised the role of certain Level 2A (ie. former HQLA2 assets) and Level 2B assets in liquidity management by permitting these to be repo-eligible with the RBA for normal market operations and also eligible collateral for the committed liquidity facility (CLF) from the Reserve Bank of Australia (RBA). These include certain sovereign, supranational and foreign agency Australian dollar-denominated bonds, RMBS rated AAA or higher, and some corporate debt securities. ADIs with access to the CLF are therefore likely to have appetite to hold these types of assets as part of a well-diversified liquid assets portfolio.
Equities are not repo-eligible with the RBA.Cash inflow and outflow ratesThe Basel Committee has made a number of revisions to the cash outflow assumptions affecting the LCR calculations. These include the following:Non-financial corporate, sovereigns, central banks and public sector entity (PSE) deposits: The revised framework has reduced the assumed cash outflow rate for non -operational non-financial corporate, sovereign, central bank and PSE deposits from 75 per cent to 40 per cent. APRA proposes to adopt this amendment.Liquidity facilities for non-financial corporates: The revised Basel III framework has reduced the cash outflow rate for liquidity facilities provided to non-financial corporate customers from 100 per cent to 30 per cent. APRA proposes to adopt this amendment.Collateral outflows attributable to market moves: The original Basel III liquidity framework gave national authorities discretion in setting the methodology for the calculation of collateral outflows related to market movements of derivative positions. The revised framework has removed this discretion and provides a standardised method for this calculation. APRA proposes to incorporate the standardised method into APS 210. This method requires ADIs to take the largest absolute net 30-day collateral flow realised in the past 24 months and model this balance as an outflow.Committed but unfunded inter-financial liquidity and credit facilities: The revised framework has reduced the cash outflow rate for committed but unfunded liquidity and credit facilities provided to banking institutions that are prudentially supervised from 100 percent to 40 percent. APRA proposes to adopt this amendment.
Fully insured unsecured wholesale funding: The revised framework includes an additional outflow category for fully insured non-operational, non-financial, unsecured wholesale deposits. APRA proposes to adopt the outflow rate of 20 percent.
- Additional derivatives risks: The revised framework includes a number of additional collateral outflow categories designed to ensure that risks associated with derivative positions are correctly captured in the LCR. The cash outflow rate for these categories is 100 per cent of the measured value. APRA proposes to adopt these amendments.
- Derivatives secured by HQLA: The revised framework has clarified that where a derivative cash flow is secured with an HQLA1 asset, a cash outflow rate of zero per cent is to be applied. APRA proposes to adopt this amendment.
- Maturing secured funding transactions: The revised framework has reduced the outflow rate on maturing secured funding transactions with a central bank from 25 percent to zero percent. In the event that a secured funding transaction backed by CLF eligible collateral matures during a stress event, an ADI with a CLF will be able to roll the secured funding transaction because of the RBA's commitment under the CLF. This will result in an outflow against this transaction of zero per cent. However, if the same transaction matured for an ADI that did not have a CLF, that ADI would have no guaranteed ability to roll the transaction, resulting in a possible outflow rate of 100 percent. APRA therefore proposes to include an additional category for maturing secured funding transactions backed by CLF eligible debt securities (where the ADI has capacity available under its CLF limit) with an outflow rate of zero percent. Following consultations with the RBA, APRA proposes that all other maturing secured funding transactions with the RBA that are not backed by HQLA will receive an outflow rate of 100 percent.
APRA has received submissions on a number of other cash outflow assumptions. Its response to these has been mixed, ranging from their partial acceptance, where submissions are consistent with the Basel III liquidity framework provisions, to the wholesale acceptance or rejection of the relevant submissions.
Other issues raised in submissionsMinimum liquidity holdings regimeThe 2011 discussion paper proposed that ADIs subject to the minimum liquidity holdings (MLH) regime, would not be subject to either of the two new Basel III global standards. Instead, they would be required to maintain minimum liquidity holdings, as outlined in APS 210.This approach was confirmed in the updated draft APS 210. However, in response to submissions, APRA has made some minor adjustments to the MLH regime. These include the removal of the previously proposed 20 percent limit on the holding of assets with a credit rating grade 3 or lower as part of an ADI's MLH. However, APRA has maintained its exclusion on holding RMBS and ABS in MLH portfolios.
Qualitative requirementsIn its 2011 discussion paper, APRA proposed to incorporate into the revised APS 210, the qualitative requirements for liquidity risk contained in the Basel III liquidity framework.These include:requirements for enhanced board oversight of ADI's liquidity risk management framework;an articulation of the board's tolerance for liquidity risk;quantification and allocation of liquidity costs and benefits; and other matters.Submissions were supportive of these measures and so these remain unchanged in the updated draft APS 210.
As part of the 2011 discussion paper, APRA had proposed the introduction of prudential disclosure requirements in respect of an ADI's liquidity risk management framework and liquidity position. Submissions concerning this proposal raised the undesirable market outcomes that may result from the disclosure of an ADI's LCR. APRA has clarified that it is not intending to introduce its disclosure requirements at this stage. It will consult separately on these requirements after the Basel Committee has published further guidance on this issue.
Next stepsAPRA has invited submissions on the second consultation package by 17 June 2013. As part of the consultation process APRA has also asked for information from interested parties on the financial impact of its proposed implementation of the Basel III liquidity framework. Following consideration of submissions received, APRA has indicated that it will issue a final APS 210 and APG 210 in mid-2013.
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