In several episodes of Star Trek, the Starship Enterprise lands on a picturesque planet where: the streets and buildings are clean and shiny; beautiful young women wear 1960s miniskirts; handsome young men wear 1970s jumpsuits; and the planet is ruled by wise, old bearded men wearing togas. [Incidentally, why is that advanced civilizations always seem to have such bad taste in fashion?]
The planet is a lush paradise and the crew of the Enterprise take the opportunity for a little R&R, somewhat like the Playboy Mansion reality show without the porn. All, that is, except the Enterprise's Chief Rick Officer, Dr. Spock, who has a gut feeling that all is not right.
Not least because we have seen similar plot lines before, we know that there is likely to be a dark secret at the heart of this planet, and soon Spock and Kirk will find it. The secret usually involves an all-powerful 'computer brain' that is kept alive by regular sacrifices of young children. When this is pointed out to the inhabitants of the planet, all hell breaks out, since nobody wanted to know the answer to the question of why their kids were disappearing in the first place. The final scene of the plot usually shows the crew of the Enterprise fleeing from an angry mob, and as the spaceship blasts off, the planet behind disintegrates into exploding chaos.
The not so subliminal message is that 'Earth may not be paradise, but at least it is not based on a lie' [mmmmnh? - discuss]
This fantasy is not dissimilar to Planet Basel!
Now Planet Basel should not be confused Basel, which is a Swiss city, also clean and shiny with a few beautiful women, handsome men and wise elders, but with fashion that is more like 1980s East Berlin than Swinging London. The only really taxing question in that Basel is: Fondue - why?
Planet Basel on the other hand is a regulatory paradise, where all is perfect and thorny questions are never asked, let alone answered.
A recent example is a speech by Jose Maria Roldan, a wise elder of Planet Basel's ruling clique, ominously called 'the' Committee. In his pronouncements to British Bankers (the few that are left of course), Senor Roldan reportedly said that 'Basel II is the best way forward to build banks' capital requirements on'. While admitting some minor difficulties, he nonetheless opined that 'the idea is certainly not to replace Basel II, but rather to add another layer of safety.' 'You don't give up using the seatbelt just because you have an airbag', he added, failing to point out that neither the seatbelt nor the airbag worked in the recent crash.
Such optimism would be admirable, were it not for the fact that the world has just experienced a major banking crisis that not only was not foreseen by the Committee, but, during which, banks' capital requirements had to be augmented by huge taxpayer handouts.
Planet Basel's dirty secret is out: Basel II doesn't work and probably never would have worked. But the Committee is still feeding the monster and living the lie.
While the philosophical basis for banking capital requirements is best left to a more suitable forum, such as an episode of the Simpsons, one word points up the double-speak at the core of Basel II - 'counter-cyclical'.
'Counter-cyclicality' is a typical economist's term - full of suggestion, yet totally devoid of meaning. Since the advent of the Global Financial Crisis, regulators everywhere have been chanting this mantra to ward off the evil spirit of irrelevancy. In this context, counter-cyclical basically means 'make sure you keep enough gas in the tank to get to the next gas station'.
However, regulators just do not realize that one can have Basel II OR Counter-cyclicality but NOT both.
Basel II is about precision, calculating (and I use that term loosely) the minimum capital needed to cope with 'unexpected losses' over the next 12 months. On the other hand, taking a counter-cyclical approach means building up a capital buffer, well above the regulatory capital mandated by Basel II, to cope with potential problems in the medium and long term.
Basel II is like a driver who, after calculating distance, average fuel consumption, and taking into account traffic and weather conditions, buys exactly enough gas to get to the next station. On the other hand, counter cyclical drivers will fill up at the first gas station, then pull in at the next to top up and so on for the rest of the journey, always keeping plenty in the tank for emergencies. Of course, the advantage that the Basel II driver has is that, if (i.e. when) they make a mistake, there is always a taxpayer-funded gas truck coming along behind to give them a top-up of fuel when needed.
For counter-cyclical advocates, the tricky question is how much of a capital buffer is needed? We don't know. We don't even know what part of the economic cycle we are in, the beginning, middle or end, so how can we know how big the buffer should be. What is the point of calculating Basel II capital to a precise confidence interval of 99.9% if we are then going to wave a counter-cyclical finger in the air and multiply by 1.2, or 2.3 or 6.7 or whatever?
You cannot sensibly have both approaches! Unless, that is, you live on Planet Basel?
All of this, of course, would be a comedy, if were not for the tragedy that the Committee is plowing ahead with a raft of changes to Basel II, even before the rules have been rolled out to all existing jurisdictions, most notably the USA.
As bankers flee from the angry mob of Planet Basel regulators, they can look back on an empire that is close to disintegration. Maybe they can adapt the immortal words of Captain Kirk - 'boldly go, em, go boldly, em, just go!
