The new Basel III capital requirement regulations are supposed to strengthen the international financial system, with their avowed effect being to:
- improve the banking sector’s ability to absorb shocks arising from financial and economic stress, whatever the source
- improve risk management and governance
- strengthen banks’ transparency and disclosures.
In fact, the regulations threaten to wipe out community banks, which were not responsible for any of the problems these regulations seek to address. As Cam Fine of the Independent Community Bankers of America puts it, in stark language:
Unchanged, these Basel III capital rules, together with the extended near-zero interest rate environment and extremely restrictive proposed mortgage and other new credit rules, will significantly impact in many and very negative ways every community bank in this nation. Basel III (together with all the other piling on) will have the aggregate effect of not only significantly damaging Main Street and rural America and millions of credit-seeking consumers and small businesses, but also will likely do what the Civil War, the Great Financial Panic of 1907, the Great Depression and the Great Recession could not do—wipe out the community banking industry by the end of this decade. If the federal banking regulators truly want to reduce this nation’s commercial banking system to a handful of banks, imposing Basel III capital rules on community and midsize banks will do it!
What we are seeing here is yet another example of how regulation misfires. Financial regulation in particular, meant to control the big banks, has in fact dramatically decreased the chance of creative destruction ever occurring again in the banking industry. The raft of regulations passed around the world since the financial crisis began (and in many cases before it) have merely created massive entry barriers to the banking industry, and as such are protecting the big banks from competitive discipline. You may be disgusted by the big banks’ behavior over recent years, but soon you may not have any other option than the big banks if you want banking services. And financial regulation will be to blame.