The Financial Times reports that Basel committee on banking supervision will be inundated with protests from the banking industry, complaining that the timescale and content of the proposals – designed to insulate the industry from another financial crisis – could backfire, cutting bank profits to unsustainably low levels and cutting off the lifeblood of credit to the economy.
 

Banks’ return on equity levels would be cut by at least a half, according to many bankers and analysts, to as little as 5 per cent. They argue that the industry would find it impossible to attract new investors, in competition with more profitable sectors.
 

While many banks complain about aspects of the proposals, one clear axis has emerged, between French, German and Japanese institutions, concerned about several key issues.

The planned ban on most deferred tax assets – counting prior-year losses as capital on account of its potential boost to after-tax earnings – is particularly sensitive in Tokyo, where in some years they have accounted for the majority of bank capital, according to estimates.
 

The proposed rules on the capital treatment of subsidiaries held alongside minority investors is a big issue in France. Crédit Agricole is reckoned by analysts to be among the most at risk from the proposal, which would oblige a bank to account for 100 per cent of the capital requirements of a subsidiary, even if another shareholder holds a substantial minority stake.
 

The most vociferous complainants will also argue that the overall reappraisal of capital structures – designed to push banks to raise more equity, while de-emphasising the kinds of hybrid capital instruments and preference shares that were unable to bear the losses of the financial crisis – goes too far. Most banks believe that core tier one capital will in future have to comprise equity and little else.
 

But some, including the French, Germans and Japanese, are hoping that their versions of hybrid capital, such as French banks’ loss-bearing preference share structures, will be exempt from any crackdown. The one big question, which will not be resolved until the end of the year, is at what level Basel will pitch the new core capital ratio, compared with the current bank norm of about 8 or 9 per cent.

 

FT article (subscription needed)