Threatening credit crunch: Should the Basel II rules be overhauled or temporarily suspended?

In the wake of the financial crisis demands are increasingly being voiced for a reform or even temporary suspension of Basel II. Critics point particularly to the system-inherent pro-cyclicality. Is this mechanism partly responsible for the existing or supposed credit crunch? Martin Hellwig, Max-Planck Institute for Research on Collective Goods, Bonn, argues that the conceptual foundations are lacking with the currently practised system of the equity capital regulation of banks. The intended effects have never been clearly laid out. In actual fact the equity capital regulation had the effect of a “fire feeder instead of a fire extinguisher” in the current crisis and should be “fundamentally altered or dismantled”. For Martin Faust, Frankfurt School of Finance and Management, Frankfurt am Main, Basel I and Basel II are not the sole reasons for the credit crunch, but they favoured the developments that led to it. The response to the current crisis should thus not be an easing of the Basel II rules, for example with the acceptance of equity capital components, but rather a fundamental reform. Also Hans-Peter Burghof, University of Hohenheim, sees many reasons for re-working the Basel rules, as these rules are “a highly imperfect compromise between what is theoretically desirable and what is feasible in practice”. The Basel norms, however, should remain in effect since inadequate equity capital is dangerous and banks without sufficient capital reserves pose a systemic risk. Mario Ohoven, German Federal Association of Small and Medium sized Enterprises (BVMW) Berlin, blames the credit crunch on a regulatory failure. Basel II distorts the credit markets because it treats lending and securitisation unequally. This system of rules must be replaced by a Basel III so that the credit supply to SMEs does not continue to worsen. Christoph Schalast, Frankfurt School of Finance & Management, Frankfurt am Main, finds no convincing arguments for suspending Basel II, since this could shake the confidence that is just beginning to be re-established in the finance industry.