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June 10, 2024

Basel Committee Must Stop Global Banks From Continuing To Cheat On Key Regulatory Tests And Endangering Financial Stability

WASHINGTON, D.C.— Better Markets filed a comment letter with the Basel Committee on Banking Supervision on a proposal to stop global banks from manipulating their balance sheets to cheat on key regulatory rules:

Why it Matters. The rule proposed by the Basel Committee is necessary because clear evidence shows that the biggest global banks that pose the gravest risks to the financial system and economies of the world have been systemically, knowingly, and intentionally cheating on critical regulatory tests for many years. Worse, they are cheating so that their highest risk activities will be under-regulated, that they can increase short term profits and bonuses, and shift the costs of losses and failures to society.

What we said. Such cheating may not be illegal, but it is dangerous and wrong, and knowingly so. ‘Window dressing’ is far too polite a phrase to describe what the executives at the global banks have been caught doing: they are rigging key regulatory test results to mislead regulators. The purpose of that cheating is to understate their highest risks in their most highly profitable activities. It’s a clear case of privatizing risk-created gains (compensation/bonuses) while socializing the associated risk-created costs (failures/crashes/bailouts).

Bottom Line Finally, given the clear evidence of cheating unearthed by the Basel Committee here, it is only reasonable to suspect that the global banks are cheating like this elsewhere. For example, are they cheating on their internal models for determining risk weights and thereby understating the required capital to prevent failure and crashes? This evidence raises the questions of how broad and extensive the cheating at the global banks is and how great is the threat to society from the under-regulation that results from that cheating. After this rule is finalized, those are the questions all regulators around the globe must answer.

You can read the full comment letter here.


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