Basel III & CBDCs: The Seismic Changes Facing The Global Financial System

Authored by Alasdair Macleod via GoldMoney.com, / https://www.goldmoney.com/research/goldmoney-insights/banking-faces-seismic-changes

Excerpts:

The role of commercial banks in the global economy is changing, with lending to governments and their agencies now more important than lending to goods and services industries. It is a trend which is due to continue.

The new Basel 3 regulations seem set to encourage this trend, despite retail depositors being accorded a stable funding status. Central bank digital currencies are anticipated to augment and perhaps replace non-financial business credit over the next five to ten years.

But the increasing financialisation of commercial banking brings the risk of tying its future firmly to a financial bubble. And with price inflation on the increase, it is only a matter of very little time before that bubble bursts.

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But there is a bigger picture…

Behind the convenience of a CBDC solution important monetary and economic considerations are being assumed or ignored. While central and commercial bank credit is expected to be continually expanded to finance government spending and asset inflation, the increasingly obvious consequences for prices are certain to lead to higher interest rates —and soon.

Central banks will find they have to escalate their attempts to support asset prices in financial markets, by yet further monetary expansion, or risk seeing the asset bubble implode. By embarking on a policy of engendering economic confidence by a perpetual bull market, central banks have tied the fate of their currencies to stock and bond markets.

The strategy of large commercial banks being increasingly committed to purely financial activities and turning their backs on non-financial credit expansion has led to them swapping one risk for another. Furthermore, in financial activities banks are increasingly bound to each other’s fate, exchanging counterparty risk from industrial debtors for those with other banks. And nowhere does this matter more than in cross-border banking relationships, where undercapitalised banks in, say, the EU, pose a global systemic risk which is not addressed by Basel 3’s NSFR.

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We are facing global systemic financial system risk – brought on by the massive debt loads that are burying governments, businesses and citizens.

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