Global Financial Crisis

The financial distress of the last two decades has revived interest on the question of the stability of the financial system. On the one hand, the “pessimist” view, associated primarily with Minsky argues that not only that the financial system is prone to such crises (“financial fragility” in Minsky’s terms) but also that such crises are inherent on the capitalist system (“systemic fragility”). On the other hand, the monetarists see the financial system as stable and efficient where crises not only are rare but also are the fault of the government rather than the financial system as such. For many others, however, financial crises may be largely attributable to the financial system but they are also neither inescapable nor inherent in a capitalist economy.

Therefore, the issues we have to examine here are how common are such crises from a purely historical perspective; to what extent we can identify a common pattern between all crises which would suggest an endogenous process that leads to crises; a theoretical framework which explains both the process and the frequency of such crises and finally examine the extent to which these financial system characteristics that make it prone to crises are inherent on the capitalist system.

The first question, i.e. the frequency of financial crises partly depends on our definition of crisis. A financial crisis has been defined by Goldsmith as “a sharp, brief, ultra-cyclical deterioration of all or most of a group of financial indicators – short-term interest rates, asset (stock, real estate, land) prices, commercial insolvencies and failures of financial institutions”. The question here is of what intensity and/or intersectoral spread should a financial disturbance be in order to be considered a crisis.

In any case, it appears that though major crises leading to the (near) collapse of the financial system are quite rare (the only one being 1929 in the US), more moderate ones are frequent enough to allow the argument that the financial system does suffer from a certain degree of fragility. In the post-war period, after an almost complete absence of crises until the mid 60’s, the financial system has been at strain on many occasions including the 1966 credit crunch, the 1969-70 and 1974-75 crises, the 3rd world debt problem of the early 80’s and the stock market crash of 1987.

Again a casual observation of financial crises will find a wide variety of different causes and forms as each crisis seems to have occurred in response to a unique set of accidents and unfortunate coincidences. But quoting Kindleberger “for historians each event is unique. Economics, however, maintains that certain forces in society and nature behave in repetitive ways”. Indeed, it is not difficult to distinguish a rough pattern which has been graphically presented by Minsky : crises tend to occur at the peak of the business cycle following a period of “euphoria.”

This has probably been initiated by some exogenous shock to the macroeconomic system (“displacement”) which results in new profit opportunities. The boom is fuelled by an expansion of bank credit as new banks are formed, new financial instruments are introduced and personal credit outside the banks increases. During that period there is extensive “overtrading”, a not very clear concept which generally refers to speculation for a price rise, or an overestimation of prospective returns due to euphoria. This stage is also often referred to as a “mania” emphasising its irrationality and “bubble” predicting the collapse.

Eventually, some insiders decide to take their profits and sell out and the increase in prices begins to moderate. A period of “distress” may then occur until speculators realise that the market can only go downwards. The crisis may be precipitated by some specific signal such as a bank or firm failure or a revelation of a swindle; the later are quite frequent in such circumstances as people try to escape the imminent collapse. The rush out of the real or long term assets (“revulsion” in Minsky’s terms) lowers the prices of these real assets which were the object of the speculation and may develop into a panic. The panic continues until either the price falls so low that people are tempted to keep their illiquid assets or a lender of last resort intervenes and /or manages to convince the market that money will be made available in sufficient volume to meet the demand for cash.

Minsky, unlike many others who otherwise accept much of his model, believes that this process will always result to a crisis. Minsky classifies the demand for credit to “hedge finance” when cash receipts are expected to exceed the cash payments by a significant margin, to speculative finance” when, over some periods, expected earnings are less than payments and to “Ponzi finance” when the payable interest in the firm’s commitments exceeds its net income cash receipts; thus a Ponzi unit has to increase its debt to be able to meet its commitments. Once the Ponzi finance situation becomes general, a crisis is inevitable. Others, however, believe that there are ways to prevent Ponzi finance from becoming too widespread.

This model described above implies that crises are in part endogenous and in part outcomes of exogenous disturbances. Whether this conclusion supports the “financial fragility” view depends on the weights given to the disturbance and the endogenous part of the process. If the shocks necessary to set off this process are of exceptional size and rare then obviously the financial system can be thought as stable. Indeed it has been suggested that the recent crises have in fact showed the resilience of the financial system against huge adverse shocks. If instead the speculative forces are triggered by even relatively small shocks we can then blame the financial system even if the shock were exogenous.

This is both an empirical and theoretical issue. Empirically the euphoria-distress-revulsion process seems to conform with the experience of many crises such as the 1929 stock market crash, though many others have not gone through the whole process. Theoretically, we have to explain the assertions of the above model, namely for the existence of speculation and other “irrational” behaviour as implied by “manias” and “overtrading”.

Friedman rejects the notion of destabilising speculation completely as a destabilising speculator who bought when the price was rising and sold when it was falling, would be buying high and selling low so that he would be losing money and fail to survive. The answer may be that we can distinguish in two groups of people: the “insiders” who are rational and possess a lot of information and the “outsiders” who may not be “fully” rational and/or not possess adequate information. In such a world, the insiders have incentives to speculate and gain at the expense of the outsiders. We may also distinguish in the 2 phases of the bubble, a first “rational” one based on “fundamentals” and a second where agents’ behaviour is best described by ‘mob psychology’. Other possibilities are that agents may choose a wrong model of the economy or fail to anticipate the quantitative rather than the qualitative reaction to a certain stimulus, especially if there are time lags.

The question, however, is whether outsiders learn by experience though it can be argued that in rapidly changing complex financial markets such learning may not be very effective. Still “euphoria” arguments may be a little naive when applied, for example, to contemporary bankers who have access to a wealth of sophisticated advice. Indeed a criticism of the Minsky model is that though it might have been true of some earlier time, it is no longer so as big unions, big banks, big government and speedier communications have improved the stability and efficiency of the system. Hansen similarly argues that since the mid 19th century the main outlets of finance were the industrialists rather than the traders and merchants reducing the instability of credit. As we shall see later on, especially after the recent deregulations such arguments are questionable.

The monetarists further object to this theory because they argue that we should distinguish between “real” or “true” crises which were caused by changes in money supply and “pseudo-crises” which were not. For example, Friedman has argued that the 1929-32 crisis was largely due to a fall in the money supply. There is little reason, however, why the supply of money is more than an element in financial flows and stocks and indeed Friedman’s explanation of the Great Depression has been challenged.

Minsky has further argued that the fragility of the financial system relative to disturbances and speculator behavior depends on three factors: the mix of hedge, speculative and Ponzi finance in the economy, the levels of liquid asset holdings (what he calls “cash kickers” and Margins of Safety) and the way used to finance Investments of long gestation. He further argues that inherently and inevitably the capitalist system will result in the worst combination of the above as far as financial stability is concerned. Minsky bases such conclusions on what he calls a “Wall street economy” paradigm as contrasted to the essentially barter economy of the neoclassical paradigm. Minsky in fact traces his views on Keynes who also expressed his concern for an increasingly speculative and unstable financial system governed by animal spirits.

In an initially robust financial system, he claims, agents will overestimate the stability and success of the system and will increase their indebtedness (an “euphoric economy”), so that speculative finance will become the norm. Similarly overconfidence will make agents reduce their Cash Kickers although such margins are crucial for speculative finance units. These mean that the economy and the financial system become very sensitive to variations in interest rates. Finally, investment projects which have a long gestation period can be financed either sequentially or by prior financing. For similar reasons agents generally chose the risky way of financing projects sequentially which not only further increase the interest sensitivity of the financial sector but increases the volatility of interest rates themselves as they imply an inelastic demand for finance given sunk costs plus possible effects in the real economy through falls in Aggregate Demand. This, however, does not sound a very robust argument as one would expect that as Wallich argued, once the system becomes fragile, the agents will get scared and reverse the trend towards speculative finance.

Moreover, the Stiglitz paradox argues that destabilising speculation is an inherent characteristic of the system. A financial system is an information infrastructure and as any infrastructure being a public good poses problems in being paid by the price system. Hence “noise” is needed to remunerate active financial markets.

Here we could also mention that many of the disturbances which cause financial crises, may in fact, be endogenously caused by the capitalist system. Nevertheless, this argument cannot be stretched too far and on the other hand one could attribute the apparent greater instability of the financial system the last 2 decades to the hardships of the real economy (oil price shocks, stagflation). In this later case the financial system emerges as particularly resilient , certainly more so than the real economy. Indeed, many people such as Kindleberger, believe that financial disturbances are neither inherent in the system nor is it inevitable that they will develop into crises. Most concentrate on the issues of appropriate monetary policy, regulation structure and lender of last resort facilities.

Monetarists obviously support that a monetary rule is adhered though others, including Minsky, fear the consequences of high volatility of interest rates. The lender of last resort facility has generally proved to be quite effective in preventing financial collapse throughout the post-war period. The problem, however, is that it creates a moral hazard problem as agents are encouraged to be more risky. This problem may increase in significance in the future as the importance of the commercial banks relative to other financial institutions declines and for most of these institutions the moral hazard costs are considered to be much higher and lender of last resort protection is not generally widely available to them. Also in our increasingly globalised financial system, there is none really able and willing to play the role of the international lender of last resort; the collapse of 1929-32 is often partly attributed to a similar lack of lender of last resort as Britain was unable to play this role anymore and the US were unwilling.

The widespread deregulations of the last two decades have also attracted attention regarding their effect on financial stability. On the one hand, it is argued that the subsequent rationalisation not only increased efficiency, the quality and the variety of financial services but helped stability as well by for example allowing a better allocation of risk towards those who can bear it more easily. Others, however, point to the increased difficulties for conducting monetary policy, the increase in indebtedness, the increase in credit risk as business finance shifted towards securities and the greater freedom in speculative behaviour.

Furthermore, as Kaufman feared, completely liberated markets will increase instability by allowing crises to quickly spreading to other sectors and countries. In many respects, the Savings & Loans debacle is typical of the problems of deregulation: Though most people would agree that deregulation was long overdue, its timing (coincided with a crisis in the S&L industry which encouraged speculative behaviour) and the easing of “safety-and-soundness” regulation proved catastrophic. Indeed there is a significant group of economists who while support deregulation, strongly recommend the imposition of restricted safety and soundness regulations to increase the stability of the system.

If through either of the above instruments, crises can relatively easily be prevented or stopped then it is clear that they are much less dangerous and less important. Indeed, since one could include such government actions as part of the actual financial system, then one could conclude that the system endogenously prevents crises from occurring.

Concluding, I believe that the financial market has in fact shown remarkable resilience and adaptability in the face of the condition of the real economies, the shocks experienced and the rapid deregulation. The issue of financial instability is and should be a concern but probably the best policy towards that objective is to have a healthy and stable “real” economy. How to achieve this is indeed another question.

It may be useful to summarize the argument. A system of financial regulation was crafted out of the financial turmoil of the 1930s. It had two defining characteristics, the restriction of competition and government protection. This institutional structure was created in conformity with the concrete conditions at the time (low debt, high liquidity, low inflation, and low interest rates). It was successful in the postwar period in the United States in part because of that conformity. The high profit rates in the early postwar period also helped to create a situation in which no financial crises occurred.

Eventually, however, those conditions changed: debt increased, liquidity declined, profits fell, and inflation and interest rates increased. The worsening financial conditions in the later postwar period contributed directly to the reemergence of financial crises. The old institutional structure, rather than leading to stability and profitability for financial institutions, resulted in instability and financial difficulties in the context of these new conditions. Banks and thrifts found themselves in a difficult situation intensified by the tight monetary policy beginning in the early 1980s. Financial crises increased, as did failures of thrifts and commercial banks. Eventually the banks and thrifts searched for riskier, potentially more profitable, but ultimately more speculative areas of lending.

Recent Financial Collapse 240 Years In The Making

Following the recent financial collapse, everyone had an opinion of who was to blame. Many said that greedy Wall Street firms that invented things such as credit default swaps and mortgage backed securities caused markets to eventually break down. Other people blamed the lenders and brokers who sold the products and steered consumers into mortgages that they could not afford. Still others blamed politicians for decades of liberal policies towards homeownership and overall deregulation of the financial industry. Perhaps, every American in some way was to blame for a huge “boom” and “bust” cycle which had not been seen since The Great Depression. I would argue, however, that the road to financial ruin is one that was started well before any of us were even born. The real root cause of our banking problems can be traced all the way back to the birth of our nation, almost 240 years ago. It was a problem that the Founding Fathers warned us about and tried to prevent. Unfortunately for us, The Founders were not successful.

The founders were just coming out of a devastating depression when the constitution was adopted and several hurtful policies were enacted that are still in effect to this day. The biggest error was that the issuing of money was turned over to a private group of bankers who set up an institution called the Bank of the United States. This decision was strongly discouraged by The Founders who believed that the people’s money should only be controlled by the legislature and the people’s direct representatives. The Bank of the United States no longer exists but a very similar arrangement continues today under the Federal Reserve System.

I think it is safe to say that, over the past 240 years, private bankers have intentionally and unintentionally destroyed our currency due to fractional banking. The Bank of the United States, for example, was allowed to issue three or four times more paper notes or loans than it had in assets. Of course, today, this continues to the extreme as we have seen some investment banks recently leverage their assets by 10 or even 20 times their assets causing enormous amounts of liquidity problems when the markets began to move downward.

The founding fathers knew that if the money was turned over to private bankers that fractional banking could have disastrous effects. The banks would be able to inflate the economy by loaning out fictitious paper money with no assets behind it. This would “boom” the economy. Then, when borrowers overleveraged themselves so much that an enormous bubble was created, a “bust” or recession would hit. And of course, that is exactly what happened during The Great Depression and again during the recent real estate bubble and financial collapse. Instead of an economy of wealth, as The Founders intended, our nation has become an economy of debt.

Unfortunately, it does not appear that sound monetary reform is on the political agenda. But, our country desperately needs a change or we will continue to see dangerous bubbles and recessions in the future. The only real reform would be to take power away from private bankers in the Federal Reserve System and give Congress the responsibility to issue its own money. Also, private banks should be required to lend on existing assets rather than issue loans based on merely a fraction of their assets. The result would be the end of the “boom and bust” cycle and a truer representation of our Founding Fathers’ vision. Critics would argue that our economy would grow a lot more slowly causing high unemployment and our ability to regulate monetary policy would be hindered by a slow moving legislature. But, the truth is that even though our economy would grow more conservatively, it would also not be built on a house of cards borrowed from fictitious paper money. Instead, our economy would have a strong foundation of actual, real wealth. Regarding the slow moving nature of the legislature, does anyone really believe the Federal Reserve has done a good job preventing recessions? Did the Fed Chairman do anything at all to prevent the real estate bubble or did he instead support monetary policies that encouraged inflated property prices? And the most important question – Do we the people have the courage to enact the necessary changes that would restore control of the monetary system to the people? Not a chance.

US Retirement System – The Next Obama Overhaul?

“A nickel ain’t worth a dime anymore.”

If you’re a baseball fan, you’ll likely remember Hall Fame Yankee catcher, Yogi Berra, who became best known for his humorous, cracker-barrel one-liners, including the above quote. His point, although made in the 1940’s, is just as true today. Uncertain future inflation and the erosion of future purchasing power is one of many factors which make financial planning for retirement so extremely difficult and why the government is feverishly studying how to secure today’s very shaky retirement system.

While the country attempts to digest the long-term impact of the recently passed healthcare bill, today’s administration has its eye on another major problem and much needed overhaul: the retirement system. In fact, government studies and recently proposed legislation cite the need for major changes in today’s retirement system in order to pre-empt financial disaster for middle class Americans, not just a disadvantaged few. Perhaps because the “tsunami” hasn’t hit, we have yet to see media headlines regarding the impending retirement crisis, but the government is working feverishly to devise, at least partial, solutions.

A number of potentially disastrous issues have the keen attention of the White House, including the following: (1) the largest generation in the history of the nation, the baby boomers, has begun entering retirement and will continue to do so for another fifteen to twenty years. In sheer numbers, the “belly of the python” should enter retirement in the year 2016. Some estimates forecast the number of retirees in America to double within the next generation, while the number or workers supporting them will significantly decrease; (2) the decline in the value of financial assets has been coupled with an equally dramatic decline in home prices across America, which has further diminished workers’ retirement security by eroding the value of the largest single investment for many middle-class families; (3) the shift from defined-benefit pensions to 401(k) and other defined contribution plans has left more workers than ever before to plan their retirements for themselves and to bear the risk of retirement investing alone; (4) Social Security is expected to meet a mere 40% of income needs for most retirees; (5) even for workers who save at recommended rates for their entire lives, dutifully stashing away funds into their 401(k) and IRA plans, the possibility of another market “disruption” always poses serious risks, as the recent financial crisis so tragically illustrated; and, finally, (6) the predominate use of defined contribution plans (unlike the good old days when retirees received a gold watch and a pension check for life from employers) leaves retirees and their savings exposed to the three great unknowns: (a) an unknown life span; (b) an unknown investment return; and, (c) an unknown future inflation rate.

With such tremendous financial vulnerability in retirement, those high up the government food-chain are researching how to avoid a potential train wreck. Translation – our federal government can’t afford the expense of providing huge supplements to Social Security in order to ensure our seniors avoid impoverishment. With little fanfare to date, the federal government has been carefully studying the above issues. In early 2010, the White House Task Force on the Middle Class produced a report which confirmed its worst retirement fears and stated, “The current system does not provide sufficient retirement security for millions of Americans.” The report went on to suggest promoting the availability of guaranteed lifetime income products, which transform at least a portion of retirees’ savings into guaranteed future income, reducing the risks that retirees will outlive their savings or that their standards will be eroded by investment losses or inflation.

The U.S. Government Accountability Office, in a July 2009 report, noted that, “Workers covered by defined contribution plans, in particular, risk making inadequate contributions or earning poor investment returns, while workers with defined benefit plans risk future benefit losses, due to lack of portability if they change jobs.” The “Retirement Security Needs Lifetime Pay Act of 2009” was proposed on June 8, 2009 by Congress (H.R. 2748) and reaffirmed on June 18, 2009 by the Senate (S. 1297). The two bills are nearly identical and propose to amend the Internal Revenue Code of 1986 to encourage guaranteed lifetime income payments from annuities by excluding up to 50% of lifetime annuity payments received under one or more annuity contracts, up to a maximum of $20,000 and otherwise includible in gross income in a taxable year. Some are suggesting the creation of Guaranteed Retirement Accounts (GRAs), which would give workers a simple way to invest a portion of their retirement savings in an account which is free of inflation and market risk. Finally, the Department of Labor included in a recent agenda an initiative by its Employee Benefits Security Administration (EBSA) to promote annuities for all workers as part of 401(k) and other retirement plan benefits. Studies performed by other credible sources, such as Ernst & Young, confirm the impending retirement disaster.

All studies seem to agree on one partial solution: Americans need to supplement Social Security with more guaranteed lifetime income. In other words, while Social Security is the government’s lifetime income to recipients, it now appears that the government wants Americans to supplement Social Security with their own “private layer” of guaranteed lifetime income. Essentially, the message from policy makers is to encourage Americans to take some portion of their defined contribution plans and purchase an added layer of guaranteed lifetime income to supplement Social Security. The size of the additional “lifetime income” layer is something which each individual needs to determine, based upon needs and resources.

Whether Republican or Democrat, for or against government management or interference in our private lives, we all care about the fate of those in retirement, particularly if that includes us, or soon may. Though lifetime income via private annuities is unlikely to become a legislative mandate, I believe it’s a positive for the government to offer incentives to Americans who buy them. Consider this: if you had the resources available, wouldn’t it be wise to purchase enough guaranteed lifetime income, adjusted annually for inflation, such that, when added to Social Security, guaranteed income would cover your basic needs for as long as you live? Any extra funds you could then use for vacation and fun or bequeathing to heirs, but you wouldn’t have to lose sleep over the prospect of winding up in the poor house. If able to cover the great financial unknowns, why would you gamble with your financial future?

Ironically, and regardless of government initiatives, the most challenging retirement hurdle may lie within our human nature. The psychology that seeing a lump sum of money in your monthly statement feels better than seeing a modest monthly income check, even if you live to be 105, is difficult to overcome. And, until the time arrives, it’s so difficult to see ourselves as old or to understand how swiftly savings can waste away. But, unless you are extremely wealthy, the great unknowns (investment returns, inflation, longevity and major market disruptions) may just bring you to your financial knees, should you live long enough. The real question is, “Can you take the actions dictated by prudence and wisdom or will your feelings dictate your financial future?” I welcome your opinions.

3 Essential Financial Reports to Ensure Your Profitability

Okay, I’m going to dive right in to one of the biggest problems for many solopreneurs, and one that quite likely will keep them awake at night… finances!

Creating a robust financial management system is THE essential system for your business – after all it’s the one system that will show you:

if your business is making a profit;
if you can afford to make an investment in a program or product;
if you can take advantage of an opportunity as it arises;
or if you can take a salary (also known as Owner’s Draw) at the end of each month.

If you don’t know where you are financially in your business then you are very quickly going to get into a sticky situation. Today I’d like to share with you three essential reports you need to run on a regular (read: monthly) basis to ensure that your finances stay healthy.

1. Income Analysis: This is a very simple report that you can set up using a spreadsheet that tracks your monthly income. This is money you receive into your business from clients, products, programs, affiliate commissions – in fact, any income that you receive as part of your business activities you need to list in this report.

Set up your report so that you monitor the whole year on one spreadsheet, broken down month by month. And also categorize your income so that you can see where your biggest income streams are.

2. Expenditure Analysis: The flip side to the Income Analysis is the Expenditure Analysis and, again, you can set up a spreadsheet that will track this for you. Like the Income Analysis you’ll want to be able to see the whole year at a glance, and have it broken down month by month. You’ll also want to be able to see where most of your money goes too – your biggest expenditure items – so you’ll need to categorize your expenditure too.

Your Expenditure Analysis will contain things like your monthly list management service (e.g. 1ShoppingCart, Aweber, iContact etc.), merchant fees, shopping cart account, membership fees, advertising, website expenses etc. etc.

3. CashFlow Report: Now that you have Income Analysis and Expenditure Analysis all in place you are all set to create your CashFlow projection. Put simply, a Cashflow projection shows whether your anticipated income will be able to cover your expected (projected) expenses and this report is very beneficial to you in your business; in fact it’s a must-have!

It is an annual report and, if set up correctly, will show you how your cash will flow through your business throughout the current financial year. Again, setting up a spreadsheet so that your Cashflow is automatically calculated throughout the year is an invaluable tool for your business.

I’ve been using a Cashflow Report in my business for many years and find it invaluable. I also like to use my Cashflow Report to plan out upcoming expenses too so that I can see exactly when they’re due and how they will impact on my finances.

Not only will having a robust financial management system give you peace of mind but it will also mean that you can take advantage of opportunities immediately they arise. For example, just recently the chance to participate in a high-profile teleclass series came up, and because I have my financial systems in place, I knew straightaway that it was something I could afford take part in!

Impact of Basel III on the Financial System

The global financial system created a vacuum of financial regulatory reform and transformation. With the growth in housing defaults and the impact of sub prime loans and CDOs on the economy, the international community focused on forming a united banking front / regulation. Defined as the Basel III accord, the system was first devised in 1988 by leading central bankers in the top 10 nations. The first step in the Basel Accord, this laid the groundwork and liquidity requirement for banking institutions in the largest nations. Sprung from the liquidation of a leading German Bank, the system was built to alleviate the pressures of one banking weakness on the entire system. Stipulating that international banking organisations were required to hold 8% liquidity with respect to the total assets on balance sheet, the reform brought about significant change in the13 member states who adopted it.

Basel II was the second round of regulatory reform on the banking industry. Designed in 2004, the accord focused on three main pillars of risk, which included credit, operational, and market/liquidity. Banks were categorised based on both Tier 1 and Tier 2 capital ratios and their propensity to possible liquidity crunches. Tier 1 capital is sometimes viewed as the key measure of a banks health, defining the overall degree of assets it has on the balance sheet (ie cash/ assets from earnings, common and preferential stock). Tier 2 capital on the other hand focuses on the other assets which could include hybrid investments, sub ordinate debt, and overall general provisioning.

The Basel III Accord has recently become a topic of hot debate as it provides a new bar for banking regulation and reform. Spurn from the recent credit crunch, the Basel III will look at a number of key measures to ensure the sustainability of the banking industry. These include:

Installation of a new measure of leverage control, which will maximum the risk both a bank or hedge fund will be able to take
Credit risk limitations. Organisations are limited to amount of credit they can borrow based on their assets. It will ensure that Banks and other financials do not take on too much risk.
Liquidity Ratio changes. To alleviate the possibility of a credit crunch, firms will now need to pledge a section of movable cash or credit to ensure borrowing or lending is not hindered.
Banks will be required to have a 4.5 percentage of common equity by 2015. This level will be extended to 7% past this date.

The new Basel III accord has come under scrutiny by leading economists, and industry analysts as being too restrictive. Economically, the debate over the how much of an impact the new Basel reform will have on both developed and emerging markets is leading to a significant divide between both corporations and regulators.