Germany Screwed Up Basel I
Shortly after over-paying for a whiskey at a once-fashionable rooftop bar in midtown Manhattan last night, I ran into Mike Konczal, the blogger known as Rortybomb. The conversation quickly turned to the Basel negotiations.
We were both troubled by the possibility that Germany might succeed in weakening the capital requirement proposal or stalling implementation for a decade. Mike then told me something about the first Basel accord I had never heard before.
It seems that Germany played a decisive role in shaping a very important part of the capital requirements: the reserves against mortgage loans. Here's how a 1988 New York Times article that Mike dug up describes Germany's influence:
Though the initial proposal advocated a 100 percent capital requirement on these assets and excluded rental properties, the weighting was lowered to 50 percent and rental properties were included at the insistence of West Germany. That means that for $100 million in residential mortgages, a bank would have to have $4 million in capital, instead of the $8 million recommended by the Fed.
The Fed argued that requiring lower capital levels for mortgages would create an artificial incentive for banks to enter more mortgage lending.
Unfortunately, Germany won that argument. Let's hope they don't win this one.