EU states warn on Basel III regulations 05/26/2011
Seven member states have written to the European internal market commissioner Michel Barnier urging the Commission to use a directive to push through the Basel III rules rather than a regulation.
Writing to the EC, the member states which include the UK, Spain and Sweden, warned Barnier against using the more prescriptive form of regulation which would mean member states would not have as much control over how the new rules would be implemented.
The member states say that a regulation would prevent countries from implementing varying capital levels or risk weights to suit the individual jurisdiction.
Basel III was aimed at setting minimum capital and liquidity requirements but there are concerns that the EU's approach could take a more prescriptive form by setting a maximum capital level, despite some countries perhaps wanting to set higher capital requirements.
Robert Finney, financial regulation partner at Dewey & LeBoeuf, says: "It's wrong to focus too much on whether Basel III is implemented in Europe through a directive or a regulation. The issue is flexibility, and either form of legislation can allow for the kind of flexibility that's needed here.
"The Commission and the new European Banking Authority are both determined to create a 'single rule book' to crack down on regulatory competition between member states.
"But they seem to be going further than the approach of having 'a harmonised set of core rules', as recommended by the post-crisis de Larosière Report in February 2009.
"It is one thing to restrict or remove the 100+ discretions and options currently available to national regulators under the 2006 Capital Requirements Directive, but quite another to forbid member states to impose...
www.gfsnews.com
Writing to the EC, the member states which include the UK, Spain and Sweden, warned Barnier against using the more prescriptive form of regulation which would mean member states would not have as much control over how the new rules would be implemented.
The member states say that a regulation would prevent countries from implementing varying capital levels or risk weights to suit the individual jurisdiction.
Basel III was aimed at setting minimum capital and liquidity requirements but there are concerns that the EU's approach could take a more prescriptive form by setting a maximum capital level, despite some countries perhaps wanting to set higher capital requirements.
Robert Finney, financial regulation partner at Dewey & LeBoeuf, says: "It's wrong to focus too much on whether Basel III is implemented in Europe through a directive or a regulation. The issue is flexibility, and either form of legislation can allow for the kind of flexibility that's needed here.
"The Commission and the new European Banking Authority are both determined to create a 'single rule book' to crack down on regulatory competition between member states.
"But they seem to be going further than the approach of having 'a harmonised set of core rules', as recommended by the post-crisis de Larosière Report in February 2009.
"It is one thing to restrict or remove the 100+ discretions and options currently available to national regulators under the 2006 Capital Requirements Directive, but quite another to forbid member states to impose...
www.gfsnews.com
1 Comment
Basel III is not enough to prompt banks’ standalone credit strength to return to pre-crisis levels on its own, research from Moody’s argues.
A new report by the ratings agency agrees that the framework laid out by the Basel Committee on Banking Supervision is a positive development for the global banking sector, as it imposes “sizeable” capital and liquidity buffers to support the resilience of the system.
However, the study points out the recovery of banks’ credit strength is influenced by a number of factors other than regulation, such as emerging risks on the global stage, “skittish” financial markets and hampered recovery in many advanced economies.
Alain Laurin, a Moody’s senior vice president and the co-author of the report, comments: “While directionally positive, Basel III does not cure the structural challenges banks continue to face from a credit perspective, such as illiquidity and high leverage.”
He adds the regulations also fail to “alleviate the tension between profit-maximising equity holders and bank managers in contrast to risk-averse bondholders”.
Moody’s also claims that some banks, such as those left in a weakened state by the financial crisis, could see their credit profiles deteriorate as they struggle to comply with Basel III.
The report concludes that the new regulatory framework should be regarded as just one element of a wider programme to strengthen the ability of banks to withstand economic downturns.
www.fundweb.co.uk
A new report by the ratings agency agrees that the framework laid out by the Basel Committee on Banking Supervision is a positive development for the global banking sector, as it imposes “sizeable” capital and liquidity buffers to support the resilience of the system.
However, the study points out the recovery of banks’ credit strength is influenced by a number of factors other than regulation, such as emerging risks on the global stage, “skittish” financial markets and hampered recovery in many advanced economies.
Alain Laurin, a Moody’s senior vice president and the co-author of the report, comments: “While directionally positive, Basel III does not cure the structural challenges banks continue to face from a credit perspective, such as illiquidity and high leverage.”
He adds the regulations also fail to “alleviate the tension between profit-maximising equity holders and bank managers in contrast to risk-averse bondholders”.
Moody’s also claims that some banks, such as those left in a weakened state by the financial crisis, could see their credit profiles deteriorate as they struggle to comply with Basel III.
The report concludes that the new regulatory framework should be regarded as just one element of a wider programme to strengthen the ability of banks to withstand economic downturns.
www.fundweb.co.uk
The risk burden still threatens Europe's financial stability, and the crisis aftermath will last many years, the two vice chairs of the EU's new financial risk watchdog warned the Economic and Monetary Affairs Committee on Monday. Mervyn King and Andrea Enria repeatedly called for the EP's support when pushing through difficult reforms, particularly in better times when the financial sector would lobby fiercely against regulation.
Mervyn King, the first Vice Chair of the European Systemic Risk Board (ESRB) and Governor of the Bank of England, assured MEPs that the ESRB would not "shy away from making all the warnings and recommendations it considered necessary". Andrea Enria, also an ESRB Vice Chair and head of the European Banking Authority, said that one of the ESRB's most pressing tasks would be to tackle the "shadow" banking sector, whose activities escape the rules applying to normal banks.
Political support vital
Asked whether he had the human and financial resources he needed, Mr King insisted that generating the necessary political will would prove the biggest challenge. "The right judgements will be dependent on the existence of will and determination. At times, the ESRB is going to have to take very unpopular decisions and face an immense lobby. We count on the EP to support us in those days" he said.
Stress tests - before and after
MEPs quizzed Mr King on banking "stress tests", the next crucial round of which is just a month away. Mr King stressed that national authorities must put plans in place to tackle problems revealed by stress tests, without waiting for results to show which banks failed them. He also warned that even a bank that passes the tests should not automatically consider itself "safe".
Mr Enria said that remedial action should be taken within six months of the stress tests, after which the European Banking Authority "would use all instruments available to make sure such action is taken", should national authorities decline to co-operate.
On the banks' share of national economies, Mr King said that it was crucial that banking systems should never become as big as they did in economies such as Ireland and Iceland. "This is the biggest problem yet to be solved", he said.
The limits to supervision
Asked about the limits to controlling risk build-up, Mr King admitted that there was a limit to what supervisors could achieve. "We must realise that the structure of banking matters as much as its supervision", he said, adding that as long as the wrong incentives remained, problems would remain. Further legislation was therefore necessary, he added, again warning that this legislation, too, could be undermined if the financial industry lobby dominates the shaping of the rules.
Original Article
Mervyn King, the first Vice Chair of the European Systemic Risk Board (ESRB) and Governor of the Bank of England, assured MEPs that the ESRB would not "shy away from making all the warnings and recommendations it considered necessary". Andrea Enria, also an ESRB Vice Chair and head of the European Banking Authority, said that one of the ESRB's most pressing tasks would be to tackle the "shadow" banking sector, whose activities escape the rules applying to normal banks.
Political support vital
Asked whether he had the human and financial resources he needed, Mr King insisted that generating the necessary political will would prove the biggest challenge. "The right judgements will be dependent on the existence of will and determination. At times, the ESRB is going to have to take very unpopular decisions and face an immense lobby. We count on the EP to support us in those days" he said.
Stress tests - before and after
MEPs quizzed Mr King on banking "stress tests", the next crucial round of which is just a month away. Mr King stressed that national authorities must put plans in place to tackle problems revealed by stress tests, without waiting for results to show which banks failed them. He also warned that even a bank that passes the tests should not automatically consider itself "safe".
Mr Enria said that remedial action should be taken within six months of the stress tests, after which the European Banking Authority "would use all instruments available to make sure such action is taken", should national authorities decline to co-operate.
On the banks' share of national economies, Mr King said that it was crucial that banking systems should never become as big as they did in economies such as Ireland and Iceland. "This is the biggest problem yet to be solved", he said.
The limits to supervision
Asked about the limits to controlling risk build-up, Mr King admitted that there was a limit to what supervisors could achieve. "We must realise that the structure of banking matters as much as its supervision", he said, adding that as long as the wrong incentives remained, problems would remain. Further legislation was therefore necessary, he added, again warning that this legislation, too, could be undermined if the financial industry lobby dominates the shaping of the rules.
Original Article
Regulators must take care that new capital requirements known as the Basel III rules don't become such a burden for banks as to weigh on the wider economy, says Yves Mersch, a member of the European Central Bank's governing council. "Although these rules are necessary, it's vital to strike a balance between the economic efficiency of an intermediation system and its stability," the Luxembourg central bank chief says in a report Thursday on financial stability. "If, in a short lapse of time, the banking system is weighed on exaggeratedly, it won't have the means to ensure the effective financing of the economy."
The Basel III accords were developed by central bankers and bank regulators to prevent a repeat of the financial crisis. Drawn up during meetings in Basel, Switzerland, they raise the amount of low-risk capital banks are required to set aside as a buffer against market shocks. Countries are now in the process of writing them into law.
Some economists worry that the new international standards will curtail financing and hurt the global economy. The Organization for Economic Cooperation and Development estimates that in the medium term, Basel III will cut the gross domestic product of its members 0.05-0.15 percentage points per year.
Mersch said the new laws shouldn't delve into detail and that banks should be left with enough room to make a profit.
"We need to avoid that detail dominates the spirit of the new regulation, or we can consider it to be already obsolete," he said. "It's clear that if one overloads the industry with constraints, the regulatory pressure risks causing the transfer of banking activities to other players, such as the shadow banking system."
The solvability and liquidity ratios of Luxembourg's banking system are " quite high," Mersch said. The country's lenders have a "comfortable level" of capital, but some banks still need to "make up for some residual frailty."
www.dowjones.com
The Basel III accords were developed by central bankers and bank regulators to prevent a repeat of the financial crisis. Drawn up during meetings in Basel, Switzerland, they raise the amount of low-risk capital banks are required to set aside as a buffer against market shocks. Countries are now in the process of writing them into law.
Some economists worry that the new international standards will curtail financing and hurt the global economy. The Organization for Economic Cooperation and Development estimates that in the medium term, Basel III will cut the gross domestic product of its members 0.05-0.15 percentage points per year.
Mersch said the new laws shouldn't delve into detail and that banks should be left with enough room to make a profit.
"We need to avoid that detail dominates the spirit of the new regulation, or we can consider it to be already obsolete," he said. "It's clear that if one overloads the industry with constraints, the regulatory pressure risks causing the transfer of banking activities to other players, such as the shadow banking system."
The solvability and liquidity ratios of Luxembourg's banking system are " quite high," Mersch said. The country's lenders have a "comfortable level" of capital, but some banks still need to "make up for some residual frailty."
www.dowjones.com
Switzerland presses ahead with stricter bank rules
As it finalised legislation to go to parliament, the Swiss cabinet said the general thrust of a draft law it issued in December was unchanged but it had made a few minor changes following a consultation period.
Finance Minister Eveline Widmer-Schlumpf said Switzerland was compelled to take a tougher line on bank regulation than other countries as UBS and Credit Suisse were so big that any failure could bring down the small Alpine economy.
"There will be adjustment costs for the banks but all in all the net effect will be positive," she told a news conference. "I am convinced that the Swiss banking sector will be the winner."
The government has proposed both big banks will need an equity Tier 1 capital ratio of at least 10 percent, versus the 7 percent minimum set under the Basel III global standards which begin to take effect in 2013.
Both UBS and the powerful right-wing Swiss People's Party (SVP) have warned the plan risks making UBS and Credit Suisse less competitive, raising questions about whether the rules might still be watered down during the legislative process.
Widmer-Schlumpf rejected suggestions the government was rushing ahead with the proposals, saying they had taken more than two years of consultation since the Swiss government was forced to bail out UBS at the height of the financial crisis.
She said the plans had been broadly endorsed by experts and the banking industry -- including Credit Suisse -- and said only the SVP and UBS had expressed fundamental opposition.
Widmer-Schlumpf said the government addressed concerns raised by the SVP and others about powers proposed for the FINMA regulator in a crisis, saying FINMA would only intervene to impose an emergency plan if a failing big bank did not do so.
COMPETITIVE DISADVANTAGE?
The government proposed publishing a report on international developments every year to address concerns about Switzerland forging ahead and Widmer-Schlumpf said she expected other countries would enact similar regulations.
James Nason, spokesman of the Swiss Bankers Association, criticised the formulation of the review provision as too vague.
"The Swiss authorities should clearly commit themselves to reviewing and adapting the regulation should Switzerland's two globally-active universal banks find themselves placed at any serious competitive disadvantage," he told Reuters.
Britain too is considering capital standards more stringent than Basel III, though these would apply only to big retail banks and its comparatively lenient treatment of investment banks has provided ammunition to opponents of the Swiss rules.
UBS Chief Executive Oswald Gruebel has said the stiff Swiss standards could force UBS to move units abroad. In response, Widmer-Schlumpf noted the bank benefited from Switzerland's other advantages such as low taxes plus political stability.
Credit Suisse said it wanted to study the proposal in detail before commenting but referred to a recent interview by CEO Brady Dougan in which he reiterated his broad support.
"I fear that people may have forgotten what happened in 2008. The financial system needs to be made more robust and secure," he said, adding he assumed regulators elsewhere would also demand other global banks hold more capital.
"If that is the case, we will see the emergence of a reasonable competitive landscape around the world."
Helvea analyst Peter Thorne said the fear the rules would make Swiss banks uncompetitive was "a gross exaggeration" but they would have to cut their investment banking businesses.
"Implementation of the rules should see CS and UBS downsize their investment banking operations ... and this should liberate capital which is probably not earning its cost of capital for the benefit of shareholders," he said.
The government said parliament could vote on the matter before the end of the year so the plans could come into force by the start of 2012 at the earliest, with a transition period up to 2018 to allow implementation.
However, in a taste of a likely heated debate to come ahead of Swiss elections on October 23, the centre-left Social Democrats and Greens both said they wanted the proposals made still tougher, suggested they may still be amended or delayed.
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As it finalised legislation to go to parliament, the Swiss cabinet said the general thrust of a draft law it issued in December was unchanged but it had made a few minor changes following a consultation period.
Finance Minister Eveline Widmer-Schlumpf said Switzerland was compelled to take a tougher line on bank regulation than other countries as UBS and Credit Suisse were so big that any failure could bring down the small Alpine economy.
"There will be adjustment costs for the banks but all in all the net effect will be positive," she told a news conference. "I am convinced that the Swiss banking sector will be the winner."
The government has proposed both big banks will need an equity Tier 1 capital ratio of at least 10 percent, versus the 7 percent minimum set under the Basel III global standards which begin to take effect in 2013.
Both UBS and the powerful right-wing Swiss People's Party (SVP) have warned the plan risks making UBS and Credit Suisse less competitive, raising questions about whether the rules might still be watered down during the legislative process.
Widmer-Schlumpf rejected suggestions the government was rushing ahead with the proposals, saying they had taken more than two years of consultation since the Swiss government was forced to bail out UBS at the height of the financial crisis.
She said the plans had been broadly endorsed by experts and the banking industry -- including Credit Suisse -- and said only the SVP and UBS had expressed fundamental opposition.
Widmer-Schlumpf said the government addressed concerns raised by the SVP and others about powers proposed for the FINMA regulator in a crisis, saying FINMA would only intervene to impose an emergency plan if a failing big bank did not do so.
COMPETITIVE DISADVANTAGE?
The government proposed publishing a report on international developments every year to address concerns about Switzerland forging ahead and Widmer-Schlumpf said she expected other countries would enact similar regulations.
James Nason, spokesman of the Swiss Bankers Association, criticised the formulation of the review provision as too vague.
"The Swiss authorities should clearly commit themselves to reviewing and adapting the regulation should Switzerland's two globally-active universal banks find themselves placed at any serious competitive disadvantage," he told Reuters.
Britain too is considering capital standards more stringent than Basel III, though these would apply only to big retail banks and its comparatively lenient treatment of investment banks has provided ammunition to opponents of the Swiss rules.
UBS Chief Executive Oswald Gruebel has said the stiff Swiss standards could force UBS to move units abroad. In response, Widmer-Schlumpf noted the bank benefited from Switzerland's other advantages such as low taxes plus political stability.
Credit Suisse said it wanted to study the proposal in detail before commenting but referred to a recent interview by CEO Brady Dougan in which he reiterated his broad support.
"I fear that people may have forgotten what happened in 2008. The financial system needs to be made more robust and secure," he said, adding he assumed regulators elsewhere would also demand other global banks hold more capital.
"If that is the case, we will see the emergence of a reasonable competitive landscape around the world."
Helvea analyst Peter Thorne said the fear the rules would make Swiss banks uncompetitive was "a gross exaggeration" but they would have to cut their investment banking businesses.
"Implementation of the rules should see CS and UBS downsize their investment banking operations ... and this should liberate capital which is probably not earning its cost of capital for the benefit of shareholders," he said.
The government said parliament could vote on the matter before the end of the year so the plans could come into force by the start of 2012 at the earliest, with a transition period up to 2018 to allow implementation.
However, in a taste of a likely heated debate to come ahead of Swiss elections on October 23, the centre-left Social Democrats and Greens both said they wanted the proposals made still tougher, suggested they may still be amended or delayed.
www.reuters.com
(Reuters) - Rules designed to spare the world's taxpayers from paying for a future financial crisis could also make it more difficult to build and replace infrastructure such as the roads they drive on.
The rules, known as Basel III, will weigh on the ability of banks to provide project finance loans on which cash-strapped governments and developers of power plants, pipelines and renewable energy such as wind farms rely to fund schemes.
"Banks have been the stalwart of privately financed projects. If long-term lending requires more capital to back it, it affects the enthusiasm of banks to provide it," said Andrew Davison, senior vice president at credit rating agency Moody's.
In Europe, this will hamper efforts to attract private funds into transport, energy and communication networks that are key to economic growth as well as providing jobs at a time when many European countries are struggling with unemployment.
Construction accounts for 7.1 percent of Europe`s total employment, according to the European Construction Industry Federation. The European Union says Europe's infrastructure investment needs to 2020 could be up to 2 trillion euros (1.8 trillion pounds).
Project finance loans are also big business for banks, having grown from a $110.8 billion (67.7 billion pound) global industry in 2000 to $208.1 billion in 2010, according to data compiled by Thomson Reuters Project Finance International.
This rise, driven by the private sector's increasing participation in the funding of infrastructure, is at risk under Basel III, which will make project finance loans scarcer and more expensive due to the way they are accounted for.
"There is an expectation that the volume of project finance loans will drop very significantly over the coming years under Basel III," said Timothy Stone, chairman of the global infrastructure and projects group at accounting firm KPMG.
Under Basel III, a short-term liquidity buffer, known as the liquidity coverage ratio, will include liquid forms of debt such as government bonds and top-notch corporate paper, but not project finance loans, seen as among the most illiquid.
A second ratio, the net stable funding ratio, makes the provision of long-term debt such as project finance more expensive for banks by requiring them to match their liabilities with their assets in terms of funding.
While not all banks will abandon project finance as a result, their business will be severely affected, said Noburu Kato, EMEA head of structured finance at Sumitomo Mitsui Banking Corporation.
"I believe project finance by banks will continue because there is an increasing need for it, from governments that need to invest in infrastructure and companies that do not want to use their balance sheet. But costs will increase," Kato said.
Although Basel III is to be implemented between 2013 and 2018, bankers say the impact on project finance will be felt before the rules kick in as banks compete to show investors they are well positioned for the new capital requirements.
"I would expect most of the impact of Basel III on project finance to be priced in by 2014," said KPMG's Stone.
In the European Union, project finance accounts for slightly less than ten percent of total infrastructure finance, according to a 2010 European Investment Bank study. The European Commission is exploring initiatives such as backing project bonds to compensate for any drop in project finance loans.
www.reuters.co.uk
The rules, known as Basel III, will weigh on the ability of banks to provide project finance loans on which cash-strapped governments and developers of power plants, pipelines and renewable energy such as wind farms rely to fund schemes.
"Banks have been the stalwart of privately financed projects. If long-term lending requires more capital to back it, it affects the enthusiasm of banks to provide it," said Andrew Davison, senior vice president at credit rating agency Moody's.
In Europe, this will hamper efforts to attract private funds into transport, energy and communication networks that are key to economic growth as well as providing jobs at a time when many European countries are struggling with unemployment.
Construction accounts for 7.1 percent of Europe`s total employment, according to the European Construction Industry Federation. The European Union says Europe's infrastructure investment needs to 2020 could be up to 2 trillion euros (1.8 trillion pounds).
Project finance loans are also big business for banks, having grown from a $110.8 billion (67.7 billion pound) global industry in 2000 to $208.1 billion in 2010, according to data compiled by Thomson Reuters Project Finance International.
This rise, driven by the private sector's increasing participation in the funding of infrastructure, is at risk under Basel III, which will make project finance loans scarcer and more expensive due to the way they are accounted for.
"There is an expectation that the volume of project finance loans will drop very significantly over the coming years under Basel III," said Timothy Stone, chairman of the global infrastructure and projects group at accounting firm KPMG.
Under Basel III, a short-term liquidity buffer, known as the liquidity coverage ratio, will include liquid forms of debt such as government bonds and top-notch corporate paper, but not project finance loans, seen as among the most illiquid.
A second ratio, the net stable funding ratio, makes the provision of long-term debt such as project finance more expensive for banks by requiring them to match their liabilities with their assets in terms of funding.
While not all banks will abandon project finance as a result, their business will be severely affected, said Noburu Kato, EMEA head of structured finance at Sumitomo Mitsui Banking Corporation.
"I believe project finance by banks will continue because there is an increasing need for it, from governments that need to invest in infrastructure and companies that do not want to use their balance sheet. But costs will increase," Kato said.
Although Basel III is to be implemented between 2013 and 2018, bankers say the impact on project finance will be felt before the rules kick in as banks compete to show investors they are well positioned for the new capital requirements.
"I would expect most of the impact of Basel III on project finance to be priced in by 2014," said KPMG's Stone.
In the European Union, project finance accounts for slightly less than ten percent of total infrastructure finance, according to a 2010 European Investment Bank study. The European Commission is exploring initiatives such as backing project bonds to compensate for any drop in project finance loans.
www.reuters.co.uk
Dutch central bank President Nout Wellink said he is confident that Basel III, the new global bank rules, will make the global financial system more stable without strangling economic growth. "I am rather confident," Wellink said in an interview with Dow Jones Newswires on Monday.
Wellink, chairman of the Basel Committee and a member of the European Central Bank's governing committee, downplayed some bankers' concerns that the new rules, to be phased in, wouldn't prevent future crises and are too costly to implement.
"Bankers are complaining, saying it's costly and has unintended consequences," he said. "And, what I'm saying to them is, what you have done in the past is extremely costly, and when you talk about unintended consequences, these consequences are intended, most of them. We want you to change your business model."
Basel III, which was endorsed by the Group of 20 nations last year, requires banks world-wide to build up bigger capital buffers and deeper pools of liquidity to guard against future shocks. The new rules will become effective in 2018.
"It's quite clear that we do not want to kill sound, healthy banks, but what we want to kill is all the excesses that we've seen in the past," he said.
www.online.wsj.com
Wellink, chairman of the Basel Committee and a member of the European Central Bank's governing committee, downplayed some bankers' concerns that the new rules, to be phased in, wouldn't prevent future crises and are too costly to implement.
"Bankers are complaining, saying it's costly and has unintended consequences," he said. "And, what I'm saying to them is, what you have done in the past is extremely costly, and when you talk about unintended consequences, these consequences are intended, most of them. We want you to change your business model."
Basel III, which was endorsed by the Group of 20 nations last year, requires banks world-wide to build up bigger capital buffers and deeper pools of liquidity to guard against future shocks. The new rules will become effective in 2018.
"It's quite clear that we do not want to kill sound, healthy banks, but what we want to kill is all the excesses that we've seen in the past," he said.
www.online.wsj.com
What is Basel III? 04/18/2011
Implementation of the Basel III requirements - an international regulatory framework - will start from 2015 in an effort to improve regulation, supervision and risk management, in the banking sector
New banking regulations, effective from 2015, have been the centre of much debate recently, as banks struggle to meet the requirements proposed by the Basel Committee on Banking Supervision (BCBS).
In December 2009, the BCBS set out its concrete proposals, named Basel III, in response to the financial crisis of the preceding few years.
“The objective of the Basel Committee's reform package is to improve the banking sector's ability to absorb shocks arising from financial and economic stress, whatever the source, thus reducing the risk of spillover from the financial sector to the real economy,” the BCBS said.
As part of the Basel III rules, the minimum requirement for banks’ tier-one capital ratio (ratio of equity capital to risk-weighted assets [RWA]) has been raised from 2% to 4.5%.
Effective as of 2019, lenders will also need to add a “conservation buffer” of 2.5%, meaning banks must hold a total core capital equal to 7% of their RWA.
BCBS secretary general Stefan Walter spoke at a conference recently about the motivation behind the reforms, highlighting that in the most recent phase of the crisis there has been a significant “spillover of risk” between the banking sector and sovereigns, as governments increased their debt in an effort to stabilise their banking systems and economies.
“As a result, debt-to-gross domestic product (GDP) ratios in a number of economies increased by as much as 10-25 percentage points. It therefore is clear that the economic benefits of raising the resilience of the banking sector to shocks are immense,” Walter said.
While some believe that these new rules will be too harsh, others – such as Lord Turner, the chief of the Financial Services Authority – have said that they do not go far enough to protect the system. In a speech last month, he said that raising tier-one capital ratios to between 15% and 20% would be more appropriate.
“Have we got it right? Are we being radical enough? And do we understand the root of this financial crisis?” Turner said.
“Today’s regulators are the inheritors of a half century long policy error, in which we have allowed private sector banks to pursue their private interest in maximising leverage levels, at times influenced by a deep intellectual confusion between private costs and social optimality,” he said.
www.londonstockexchange.com
New banking regulations, effective from 2015, have been the centre of much debate recently, as banks struggle to meet the requirements proposed by the Basel Committee on Banking Supervision (BCBS).
In December 2009, the BCBS set out its concrete proposals, named Basel III, in response to the financial crisis of the preceding few years.
“The objective of the Basel Committee's reform package is to improve the banking sector's ability to absorb shocks arising from financial and economic stress, whatever the source, thus reducing the risk of spillover from the financial sector to the real economy,” the BCBS said.
As part of the Basel III rules, the minimum requirement for banks’ tier-one capital ratio (ratio of equity capital to risk-weighted assets [RWA]) has been raised from 2% to 4.5%.
Effective as of 2019, lenders will also need to add a “conservation buffer” of 2.5%, meaning banks must hold a total core capital equal to 7% of their RWA.
BCBS secretary general Stefan Walter spoke at a conference recently about the motivation behind the reforms, highlighting that in the most recent phase of the crisis there has been a significant “spillover of risk” between the banking sector and sovereigns, as governments increased their debt in an effort to stabilise their banking systems and economies.
“As a result, debt-to-gross domestic product (GDP) ratios in a number of economies increased by as much as 10-25 percentage points. It therefore is clear that the economic benefits of raising the resilience of the banking sector to shocks are immense,” Walter said.
While some believe that these new rules will be too harsh, others – such as Lord Turner, the chief of the Financial Services Authority – have said that they do not go far enough to protect the system. In a speech last month, he said that raising tier-one capital ratios to between 15% and 20% would be more appropriate.
“Have we got it right? Are we being radical enough? And do we understand the root of this financial crisis?” Turner said.
“Today’s regulators are the inheritors of a half century long policy error, in which we have allowed private sector banks to pursue their private interest in maximising leverage levels, at times influenced by a deep intellectual confusion between private costs and social optimality,” he said.
www.londonstockexchange.com
German banks need 50 bln euros for Basel III 04/15/2011
Lenders require hard equity of 50 bln eur by 2018 -Buba
* Capital needs centre mainly on the country's big banks
* Can meet Basel III targets largely via retained profits
Germany's Bundesbank believes the country's banks require about 50 billion euros ($72 billion) in additional capital to fulfil new regulatory guidelines, the central bank's vice-president said on Thursday.
"Right after the publishing of the final rules in December of last year, we started a two-stage oversight process and are accompanying the institutions in their capital plans," Franz-Christoph Zeitler said in a speech.
"A rough, preliminary estimate shows capital needs of roughly 50 billion euros, that is for the most part concentrated on large banks that actively trade," he said.
The Bundesbank had conducted a simulation that showed German banks could by 2018 largely strengthen their Core Tier 1 equity, the highest quality capital that can be used to absorb losses, to meet Basel III guidelines mostly by retaining earnings.
Because German companies only need to finance about 30 percent externally, the Bundesbank expects a negligible impact on growth. Those small and mid-sized companies who are largely unable to tap capital markets can borrow from local savings and mutual banks.
These lenders, which employ very conservative business models, are estimated to only have a minor need to raise fresh capital, according to the Bundesbank.
Reuters had reported in September that a Bundesbank study showed all German banks taken together would need around 90 billion euros in extra capital to meet the Basel targets by 2019, whether through retained earnings or capital raising. (Reporting by Christiaan Hetzner; Editing by Will Waterman) ($1=.6907 Euro)
www.reuters.com
* Capital needs centre mainly on the country's big banks
* Can meet Basel III targets largely via retained profits
Germany's Bundesbank believes the country's banks require about 50 billion euros ($72 billion) in additional capital to fulfil new regulatory guidelines, the central bank's vice-president said on Thursday.
"Right after the publishing of the final rules in December of last year, we started a two-stage oversight process and are accompanying the institutions in their capital plans," Franz-Christoph Zeitler said in a speech.
"A rough, preliminary estimate shows capital needs of roughly 50 billion euros, that is for the most part concentrated on large banks that actively trade," he said.
The Bundesbank had conducted a simulation that showed German banks could by 2018 largely strengthen their Core Tier 1 equity, the highest quality capital that can be used to absorb losses, to meet Basel III guidelines mostly by retaining earnings.
Because German companies only need to finance about 30 percent externally, the Bundesbank expects a negligible impact on growth. Those small and mid-sized companies who are largely unable to tap capital markets can borrow from local savings and mutual banks.
These lenders, which employ very conservative business models, are estimated to only have a minor need to raise fresh capital, according to the Bundesbank.
Reuters had reported in September that a Bundesbank study showed all German banks taken together would need around 90 billion euros in extra capital to meet the Basel targets by 2019, whether through retained earnings or capital raising. (Reporting by Christiaan Hetzner; Editing by Will Waterman) ($1=.6907 Euro)
www.reuters.com
Changes to the detail of Basel III will make timely implementation a challenge, say attendees at Risk Europe
Banks will have little time to implement Basel III once the final calibrations are made to the framework over the coming year, warned participants at the Risk Europe pre-conference seminar in Brussels.
The Basel Committee on Banking Supervision published the complete version of the Basel III capital and liquidity framework on December 16 last year, but several issues still need to be resolved, including the treatment of systemically important financial institutions and final calibration for a capital charge on bank exposures to central counterparty (CCP) default funds.
Meanwhile, two new liquidity measures - the liquidity coverage ratio and net stable funding ratio - are subject to lengthy observation periods prior to full implementation, and the Basel Committee has acknowledged that changes will probably be made. A review of the trading book rules - including the new capital charge for credit valuation adjustment (CVA) - will also be conducted this year.
But bankers argued every tweak to the calibration will eat into the time available for implementation, which could be a particular issue for new requirements like the liquidity ratios. "Regulators should not under-estimate how much additional detail is needed for the liquidity requirements, as well as the rules for CVA and CCPs," said one member of the audience.
Local regulators also still need to transpose the requirements into national law. Mario Nava, head of the banking and financial conglomerates unit at the European Commission, who is leading the team responsible for drafting the fourth version of the capital requirements directive, says a proposed text should be published by the end of the third quarter of this year. This then needs to be debated by the European Parliament and Council of the European Union - a process expected to take about a year. "It's a massive amount of work, but I am confident we will deliver," said Nava.
However, bankers point out that would only leave them with a few months before the scheduled implementation of much of the framework from January 2013 - although the liquidity rules and a new leverage ratio will be introduced at a later date.
"I'm concerned about the implementation time left to banks if it is due for implementation on January 2013. You cannot second guess any changes that may be made," said Russell Deyell, head of group capital management at Lloyds Banking Group.
www.risk.net
Banks will have little time to implement Basel III once the final calibrations are made to the framework over the coming year, warned participants at the Risk Europe pre-conference seminar in Brussels.
The Basel Committee on Banking Supervision published the complete version of the Basel III capital and liquidity framework on December 16 last year, but several issues still need to be resolved, including the treatment of systemically important financial institutions and final calibration for a capital charge on bank exposures to central counterparty (CCP) default funds.
Meanwhile, two new liquidity measures - the liquidity coverage ratio and net stable funding ratio - are subject to lengthy observation periods prior to full implementation, and the Basel Committee has acknowledged that changes will probably be made. A review of the trading book rules - including the new capital charge for credit valuation adjustment (CVA) - will also be conducted this year.
But bankers argued every tweak to the calibration will eat into the time available for implementation, which could be a particular issue for new requirements like the liquidity ratios. "Regulators should not under-estimate how much additional detail is needed for the liquidity requirements, as well as the rules for CVA and CCPs," said one member of the audience.
Local regulators also still need to transpose the requirements into national law. Mario Nava, head of the banking and financial conglomerates unit at the European Commission, who is leading the team responsible for drafting the fourth version of the capital requirements directive, says a proposed text should be published by the end of the third quarter of this year. This then needs to be debated by the European Parliament and Council of the European Union - a process expected to take about a year. "It's a massive amount of work, but I am confident we will deliver," said Nava.
However, bankers point out that would only leave them with a few months before the scheduled implementation of much of the framework from January 2013 - although the liquidity rules and a new leverage ratio will be introduced at a later date.
"I'm concerned about the implementation time left to banks if it is due for implementation on January 2013. You cannot second guess any changes that may be made," said Russell Deyell, head of group capital management at Lloyds Banking Group.
www.risk.net
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