Too Little, Too Late

From Reuters:

Global regulators agree tougher Basel III bank rules

BASEL, Switzerland, Sept 12 (Reuters) - Global regulators, aiming to prevent any repeat of the international credit crisis, agreed on Sunday to force banks to more than triple the amount of top-quality capital they must hold in reserve.

The biggest change to global banking regulation in decades, known as "Basel III", will require banks to hold top-quality capital totalling 7 percent of their risk-bearing assets, up from just 2 percent under current rules.

The rules may oblige banks to raise hundreds of billions of dollars of fresh capital over the next decade. Germany's banking association, for example, has estimated its 10 biggest banks may need 105 billion euros ($141 billion) of additional capital.

But to ease the burden on banks and financial markets, regulators gave the banks transition periods to comply with the rules. These periods, extending in some cases to January 2019 or later, are longer than many bankers originally expected.


Under Basel III, banks will to hold top-quality capital -- known as "core Tier 1" capital, and consisting of equity or retained earnings -- worth at least 4.5 percent of assets. They will also have to build a new, separate "capital conservation buffer" of common equity; this will be 2.5 percent of assets, bringing the total top-quality capital requirement to 7 percent. If they draw down the buffer, they will face curbs on the bonuses and dividends which they can pay out.

Another provision of Basel III, sharply criticised by some banks, will require them to build a separate "countercyclical buffer" of between zero and 2.5 percent when the credit markets are booming.

National regulators will decide when economies have entered such periods of "excess aggregate credit growth". They hope the buffer will slow lending when credit markets threaten to overheat, preventing dangerous bubbles from forming.

Although banks did not get their way on countercyclical buffers, they did appear to succeed in convincing regulators to provide generous transition periods.

The Tier 1 capital rule will take full effect from January 2015
, with the capital conservation buffer phased in between January 2016 and January 2019. Some analysts said this showed regulators were caving in to the banks.

"The phasing-in period for the new capital requirements is surprisingly long, which will add to the scepticism about the robustness of the bank capital enhancement efforts," Mohamed El-Erian, co-chief investment officer of bond investment giant PIMCO, told Reuters.


Deflation is now deeply entrenched. New capital rules will force banks to restrict lending to build Tier 1 capital levels.
Result: less lending to small businesses and residential sectors which will prompt property values to fall further.
Is this a good thing?
Yes, higher capital ratios are certainly long overdue. The old rule of 2% Tier 1 capital implied that banks could have leverage of 50 to 1!!!
That level of leverage is fine if you are gambling in Las Vegas, but is totally irresponsible if a country is to maintain a resilient banking system. I have maintained for some time that Tier 1 capital should be at least in the 15 to 20% range to enhance a robust, albeit boring banking system. After all banking is not supposed to be exciting. If you want exciting try bungee jumping. Depositing your life savings in a bank that engages in reckless lending in not the sort of risk taking in which I wish to be involved.

Another concern this raises, is the 5 to 9 year period it will take for capital rules to take effect. It seems that regulators are allowing zombie banks to remain zombies in the hope that somehow they will grow enough to meet the capital requirement. This will not help us avoid another credit crisis within 5 years.

The third concern, that the article does not even mention, is knowing with some certainty the value of assets a given bank owns. With fluid accounting rules that have cropped up over the past decade, banks can appear to be more solvent than a mark to market accounting would suggest. Unless we can see balance sheets based on Generally Accepted Accounting Principles (GAAP), we have no assurance that any of these Tier 1 capital ratios are factual. I suspect many are "marked to imagination" rather than mark to market.


  1. Hello Mr Bailey,

    Thank you for replying to my earlier post. About the subject at hand, I just don't see how business as usual, (as implied by those impending, lofty, Basel III announcements) can continue past 2019 given the impending perfect storm of economic depression, peak oil and widespread environmental degradation coming our way. So when you say "too little, too late" this may be understating the situation we face, a tad.




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