By Danielle Middleton
BEIJING, Jan. 13 (Xinhuanet) -- Following the international financial crisis of the late 2000s, the world’s financial leaders have been working toward a standardized banking system that will strengthen banks at an individual level, and thus improve the banking sector’s ability to survive stress when it occurs.
In 2010 the Basel Committee produced a third accord outlining a set of regulations, with the goal of solving the banking system’s ongoing problems. Since then the conversation has yet to cease over whether enough has been done to ensure a stable financial environment that supports growth on an international scale.
In Europe, the debate over the role Britain will play in Basel III has yet to be resolved. During early Basel III discussions in May 2012, Michel Barnier, the French European commissioner for financial regulation, clashed with British Chancellor of the Exchequer George Osborne over the suggestion of higher leverage ratios in the UK, stating that a distortion of competition within the EU had the potential to cause a continental disadvantage.
In recent times the political context surrounding Basel III has not dwindled. In the Autumn Statement released on December 5 2013, Osborne revealed that “Britain is currently growing faster than any other major advanced economy.” As it stands Britain’s rate of recovery, in comparison to that of other EU members and the US, puts the country at risk of greater pressure to conform to the standardized regulations proposed in the Basel III accord.
For Britain there is a better hope of financial prosperity and continued development in strengthening relations with China. Prime Minister David Cameron cemented that this is indeed the case during his December meetings in China, a country whose own role within Basel III is similarly undetermined. The chancellor noted:
“The Prime Minister’s visit to China is the latest step in this government’s determined plan to increase British exports to the faster growing emerging markets — something our country should have done many years ago.”
The power of the Asian market should not be underestimated, nor Britain’s vulnerable position due to its rate of economic recovery. The two issues are tied thanks to Britain’s reliance on exports. As long as the country’s main trading partners are the struggling eurozone and the US, income from exports will not match the rate of growth. It appears that the economic forecast on a global scale is beginning to draw into focus ever more the presence of China as the world’s greatest economic power.
For Britain, no country is strategically more important than China. Its population includes one-fifth of the world’s children. It is the world’s second-biggest economy, yet it does not have the power of the US and EU in terms of wielding influence in the global economy. This fact is evident in Basel III more than any other current international issue. Basel III does not take into account the logistical difficulties that the Asia Pacific region faces in implementing a regulated economy to match that of the rest of the world’s major economies.
Unlike Europe and the US, there is no overseeing financial body in Asia in regards to international financial law. As more banks throughout the EU and US opt into Basel III, Asia will be unable to operate as it has previously done. China is a financially self-sustainable body with the rest of the region not far behind; it is crucial that this growing authority is heard in the debate for financial reform and regulation, rather than an EU- and US-dominated approach. Regulations that work adequately in the EU and US could cause greater risks in the Asian market, which at its current stage of development has vastly different banking industries and financial systems between countries.
A one-size-fits-all approach would not work in encapsulating the Asian financial system into that of the EU and the US. Rather, it needs to be inclusive of standards in the Asian market to avoid spillover effects from developed country regulatory changes and low interest rate policies, which lead to the migration of risky financial activities to Asia that could affect regional financial stability.
In the same vein, Britain appears increasingly determined to forge its own path on the international economic stage. In a letter to the Governor of the Bank of England Mark Carney, the British Chancellor revealed his support for a higher leverage ratio in the UK — suggesting that it was now the right time for the Financial Policy Committee to exert more power in the direction of the globally agreed upon leverage ratio.
Since the news that Britain is drawing ever nearer to a position of financial stability was outlined only a week later in the Autumn Statement, this is a clear push for a move away from the unified regulations of Europe, and the dependence that Britain still has on its trade links in Europe and the US.
The proposed government-enforced higher leverage ratio for Britain would mean that banks are more able to absorb losses. The chancellor has remained certain that Basel III should be able to create a consistent financial regulation system, yet as Osborne has repeatedly stated, the issue for Britain is of national sovereignty with his determination to steer away from a continent-wide agreement led by Germany, France and Italy.
Danielle Middleton is a digital content writer for international law firm Maples and Calder. He writes the column for Reuters.com