Basel III: A Vehicle to Begin Collapsing the Markets Under Trump?

Shortly after the ‘Brexit’ vote in the UK, I learned through Brandon Smith at alt-market.com that the Bank for International Settlements (BIS) – whom I have previously written about in relation to Donald Trump’s election victory (‘Brexit’ and President Trump: The Bank That Adjoins Them Together), convened at the point of the referendum for their annual conference in Lucerne, Switzerland.

When the US Presidential election came around on November 8th, the BIS gathered again, this time in Washington DC for an investors conference. Hours later Trump ‘shocked’ the world by defeating Hillary Clinton for the White House.

I believed then and still do now that the timing of these meetings to coincide with both elections was deliberate in its intent and a signal of what was about to occur. ‘Brexit’ and Trump symbolised the growing narrative of a rise in nationalism / populism in Western society, at the behest of globalist elites such as the BIS.

In other words, neither result was a defeat for the establishment. Instead they created the necessary conditions for conflict that will be further utilised in 2017 in an effort to build public consensus behind centralising to a far greater degree the systems of government and global banking.

Since Trump’s ‘victory’, I have been researching more into the Bank for International Settlements, most notably through recent speeches and interviews given by Jens Weidmann, who is both president of the German Bundesbank and chairman of the board at the BIS.

Just three days into 2017, the bank announced through their website the postponement of a planned meeting on the 8th of this month to finalise the Basel III reforms.

Wikipedia describes Basel III as:

a global, voluntary regulatory framework on bank capital adequacy, stress testing, and market liquidity risk. Basel III is intended to strengthen bank capital requirements by increasing bank liquidity and decreasing bank leverage.

Another key tenet of the Basel III framework is to reduce the risk of a run on high-street banks. An aspect of the accord known as the ‘Liquidity Coverage Ratio’ is a:

short-term liquidity measure intended to ensure that banking organizations maintain a sufficient pool of liquid assets to cover net cash outflows over a 30-day stress period.

After Lehman Brothers collapsed in September 2008, the ensuing market turmoil set the groundwork for Basel III. Negotiations to introduce all its measures have been ongoing for the past seven years.

The first accord of this type – Basel I – was originally enforced into law back in 1992 by the Basel Committee on Banking Supervision (BCBS). This committee of banking supervisory authorities is responsible for devising each accord and acts as a forum bringing multiple different facets connected through the banking sector together.

Here is a diagram of how the process of creating a Basel accord works – courtesy of one of the BIS’s own papers (The global financial crisis and the future of international standard setting: lessons from the Basel Committee). This particular paper was delivered to Harvard Law School on the 12th of December 2016 by Bill Coen, who is Secretary General of the BCBS:

As you can see, the Bank for International Settlements is represented as a supporting mechanism to the BCBS. The International Monetary Fund acts as an observer to the process, whilst members of the G20 are merely informed of what the committee has come up with and have no direct input into the negotiations.

The body overseeing the Basel Committee is the Governors and Heads of Supervision (GHOS), which this next diagram from the same paper elaborates on:

The chairman of the GHOS is Mario Draghi, who is also President of the European Central Bank. The Committee devising Basel III must report to Draghi at the GHOS, which is the oversight body to the whole process. The GHOS comprises both central bank governors and non-central bank heads of supervision from the Committee’s members.

The purpose of creating these accords – at least officially – is shown briefly in this third image from the paper:

After Basel I in 1992 came the follow up – Basel II – which was initially published in 2004. According to Wikipedia, it:

was intended to amend international standards that controlled how much capital banks need to hold to guard against the financial and operational risks banks face. These rules sought to ensure that the greater the risk to which a bank is exposed, the greater the amount of capital the bank needs to hold to safeguard its solvency and economic stability. Basel II attempted to accomplish this by establishing risk and capital management requirements to ensure that a bank has adequate capital for the risk the bank exposes itself to through its lending, investment and trading activities. One focus was to maintain sufficient consistency of regulations so to limit competitive inequality amongst internationally active banks.

The financial crash of 2008 meant that Basel II was unable to ever become fully effective, and attention was soon directed at creating a more stringent accord – that being Basel III.

A potential pattern emerges when you consider that Basel III was originated out of a crisis, and has given the Basel Committee the necessary problem required in order to implement further tightening of banking regulations.

The announcement on January the 3rd confirming the delay of efforts to fully implement Basel III adds further weight to this emerging pattern.

A casual observer will know nothing about this story, seen as it was awarded no coverage on mainstream televised media and was restricted to the financial pages of broadsheet newspapers. Online awareness has been more extensive, but not outside the realm of financial oriented websites.

The FT reported that:

A meeting of the world’s top bank supervisors and central bankers scheduled for this weekend to consider a contentious reforms package has now been postponed. The long-awaited meeting was expected to sign off a series of reforms intended to make it harder for banks to avoid the higher Basel III capital requirements that were put in place after the financial crisis.

The meeting has been delayed because key parts of the reforms are still not agreed. The committee works by consensus and has no formal enforcement powers against countries that fail to implement its reforms. A refrain throughout its history has been that “nothing is agreed until everything is agreed”.

As for specific reasons why Basel III has yet to gain a consensus, the FT elaborated:

The main sticking point between supervisors in the US and their European counterparts is the so-called output floor that limits the extent to which banks can use their own models to calculate the riskiness of their lending. The floor in effect prevents them from using risk estimates that are too far below the outputs of a standardised model devised by regulators.

The ‘standardised model’ they speak of is of paramount importance to Basel III. At present, banks use their own internal models for measuring operational risk, which covers aspects such as fines and cyber crime. The Basel Committee is seeking to implement a ruling that prevents banks from operating their own model and instead switches to a standardised approach mapped out by global regulators.

Before we look at some further coverage of the delay to Basel III, consider that by introducing a standardised model – which is a cover for greater centralisation – it hands decision making over to a third party regulator. In times of a crisis, such a measure would likely be championed and supported by a public that has held banks / banksters in general disdain since 2008.

A further aspect to contemplate is that right now the perception amongst both the public and mainstream analysts is that the markets have recovered from the 2008 crash. The Dow Jones is chasing the so far elusive 20,000 level in the run up to Donald Trump’s inauguration (more on this further into the article), and US GDP figures are the highest they’ve been under Obama’s presidency. Psychologically, it appears things are running well and that there is no immediate sign of a downturn.

Which brings us back to the question of creating a problem that initiates a crisis which in turn advances calls for greater legislation. Is Basel III a vehicle for kick starting a market collapse? The FT reported back in March 2016 that the banking industry was already floating about the term, ‘Basel IV’, which some bankers believe will eventually be utilised to increase the capital requirements of Basel III.

Giles Williams, who was a partner in KPMG’s regulatory practice before his unexpected death in September 2016 (The Times reported in an obituary that he died in his sleep), said the following five months before his passing:

I remember [regulators] saying there was no Basel III when the whole industry was talking about Basel III. It seems to be a remarkably different package in practice to what came out in 2010

He was referring here to the changes made to the accord since its initial introduction seven years prior. The company Williams worked for, KPMG, has three main lines of work, they being audit, tax, and advisory. Auditing in particular is part of the Basel Committee’s process for implementing in full Basel III, not least through the involvement of the IAASB (International Auditing and Assurance Standards Board) as a participant in devising the accord.

Returning to press coverage of Basel III, Bloomberg reported that:

Top European Union policy makers have campaigned against a major element of the reform package, a so-called capital floor, arguing that it would unfairly punish the bloc’s banks and harm its economy.

The Basel Committee, which brings together regulators including the ECB, the U.S. Federal Reserve and Japan’s Financial Services Agency, holds its next scheduled meeting March 1-2. Once it reaches consensus on completing Basel III, the oversight body, whose next meeting could come in mid-March, must approve the final standards.

The EU appears to be the leading body charged with delaying the full implementation of Basel III. The main point of contention is with what’s referred to in Bloomberg’s article as the ‘capital floor’:

The capital floor has emerged as the main flash-point in several years of talks on rules intended to clamp down on banks’ use of their own complex models to assess the risk posed by mortgages, corporate loans and other assets. While big banks rely on the models to determine how much capital they need to fund their businesses, regulators have grown increasingly skeptical of the accuracy of the estimates since the financial crisis.

French, German, Dutch and Nordic banks could be hit the hardest by the floor because they have traditionally modeled minimal risks stemming from mortgages and corporate exposures, according to research from analysts at Morgan Stanley.

U.S. regulators have supported curbs on the models, while European and Asian authorities have been more likely to defend the industry estimates. Big banks including Deutsche Bank AG and Credit Agricole SA have lobbied against the Basel Committee’s proposals, arguing that they could add billions of dollars in extra capital requirements on the industry and hurt economic growth.

In response to the postponement of the January 8th meeting, Mario Draghi said:

Completing Basel III is an important step toward restoring confidence in banks’ risk-weighted capital ratios, and we remain committed to that goal

Michael Lever, who is head of prudential regulation at the Association for Financial Markets in Europe, was supportive of the meeting’s delay by saying:

AFME has consistently argued that adequate time is needed to create a framework capable of accurately measuring the risks assumed by banks, which can also accommodate structural differences between banking markets in different jurisdictions

Examining the EU’s role in Basel III further, let’s refer back to the paper that Bill Coen delivered to Harvard Law School a month ago. In it was a section called, ‘Basel Committee’s assessment of members’ implementation’, followed by a chart showing a list of countries that are compliant with the Risk-based capital standards part to the Basel accord.

One ‘jurisdiction’ as they are termed was rated as ‘Materially non-compliant’ as of December 2014 – the European Union covering 9 member countries.

In light of this, where does the upcoming inauguration of Donald Trump as President of the United States fit into the narrative? In their article Bloomberg went on to report that:

The delay probably pushes any Basel Committee meeting on the standards beyond the Jan. 20 inauguration of Donald Trump as U.S. president. Trump’s team has vowed to dismantle financial regulations, raising the prospect that whatever deal is struck at the international level could be shelved or watered down when national authorities take over the process of implementation.

Circumstantial or not, we can look at the evidence presented thus far and speculate on where this might all be heading. As I have previously blogged about, it is my theory that Trump’s presidency will precipitate the conditions for a market collapse, the responsibility of which will be blamed on the sentiment of Conservatism and will create a widespread polarisation of left vs right within the political and social spectrum.

The question is, does Basel III fit into the equation? Had the January 8th meeting gone ahead as scheduled, it likely would have advanced nearer the full implementation of the accord as it currently stands. The delay comes only two weeks before Trump’s presidency becomes a reality. If under his tenure we witness a scaling back of financial regulations, it would be completely at odds with what Basel III seeks to achieve. But is that the intention here? Setting Trump and Conservatism up for a further fall is that under Obama’s leadership, the US has been generally supportive of the accord and the need for greater regulation.

Remember that Basel II was not fully operational before the 2008 crash struck, a crash which created the conditions for a broader accord that nine years later is still a long way from becoming law. A path towards creating Basel IV out of a fresh crisis in 2017 is a possibility.

To globalist elites like the Bank for International Settlements, crisis is opportunity. A necessary vehicle in which to utilise further the agenda to centralise authority and take control away from individual nations.

What triggers a downturn in markets and cements Trump as a saboteur in the minds of the electorate is open to debate. Perhaps the rate of inflation in the US and beyond will grow to become unsustainable amidst interest rate rises by the Federal Reserve? Perhaps Deutsche Bank comes back into the picture, or Monte dei Paschi in Italy fail to stave off the threat of collapse? This bank in particular is seeking a state bailout in order to keep it operational, something which BIS Chairman Jens Weidmann is cautious about:

For the measures planned by the Italian government the bank has to be financially healthy at its core. The money cannot be used to cover losses that are already expected

These (rules) are meant especially to protect taxpayers and put responsibility on investors. State funds are only intended as a last resort, and that is why the bar is set high

The question to ask at this point is where a potential trigger point – or a series of triggers – that precipitates a crisis will stem from? The US is geared fully towards a collapse under Trump, as I have discussed, but so is the EU which is more fractured now than at any other time in its history. A fact that could be further entrenched in 2017 with the election of right-wing ‘populist’ movements in France, Germany and the Netherlands.

The next meeting of the Basel Committee is scheduled for the beginning of March. Six weeks into a Trump presidency. We wait to see under what conditions this meeting is held and whether it does indeed go ahead as planned.