Basel III is a complex package of reforms designed to make banks more resilient and less likely to need taxpayer rescue in future. It forces all lenders – particularly the largest – to build up buffers of equity, cash and liquid assets to protect themselves against unexpected losses or another market crisis.
Many representatives were complaining vehemently that the Basel Committee’s plan to subject their own and other large institutions to even higher capital requirements than those faced by smaller peers was ill-thought-out and economically and philosophically wrong. They also insisted that some provisions discriminated against US banks.
Reform Agenda
There are four key elements to the Basel III deal aimed at making banks more able to survive unexpected losses or funding problems and less likely to need taxpayer rescue. The rules will be fully phased in by 2019:
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Capital Banks - must have top quality (“core tier one”) capital equal to 7 per cent of assets, adjusted for risk, or face restrictions on paying bonuses and dividends.
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Surcharge - The biggest “systemically important financial institutions” have to carry an extra 1-2.5 per cent in capital, for a total of up to 9.5 per cent of risk-weighted assets.
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Liquidity Banks - have to keep enough cash and easy-to-sell assets to survive a 30-day market crisis.
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Leverage - The ratio of core tier one capital to a bank’s total assets, with no risk adjustment, may not exceed 3 per cent.
As the bankers see it, they are preserving the already shaky world economy and the global financial system. Forcing them to hold more capital and low-yielding liquidity will, they say, make many of their business lines unprofitable and drive up costs for customers.
Regulators see it differently. To them, the real threat comes from an unreconstructed industry still addicted to short-term funding that can dry up at the drop of a hat. They also argue that profits remain too dependent on risky derivatives and proprietary trading. Their “impact studies” suggest that enforcing a build-up of capital would trim growth only mildly in the short term. Any pain would be far outweighed over the long run by the benefits of stability.
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