tony's blog

Friday, September 24, 2010

Basel Blogging

The Basel committee recently moved to clarify the new banking capital adequacy requirements and, as expected is raising regulatory ratios. It is of course debatable that such a move provides a cast iron guarantee against further crises but it is fair to say that banks that retain better quality capital are likely to be more resilient in future periods of crises.

Whatever the reactions of the weaker (and stronger) banks to these requirements, the new world will make new demands of shareholders, regulators and governments alike. More bank capital means there will less for others to share around. Banks will have to increase their core tier-one capital ratio to 4.5% by 2015.. In addition, they will have to carry a further "counter-cyclical" capital conservation buffer of 2.5% by 2019. Any bank that fails to meet the new requirements is expected to be banned from paying dividends to shareholders. Understanding the real risk inherent in a bank’s assets will be crucial in making an assessment of the bank’s value. Balance sheets will be more important than ever before. Whilst most UK banks have already exceeded the 7 per cent for Tier 1 capital (and shares have rallied) this isn’t true across the board and has yet to be adhered to by many multi-national financial institutions.

Of course this will affect banks’ appetite for engaging in all types of business, not least mortgage lending but as for the real impact upon individual markets and activities we will have to wait. Fair to say residential mortgage lending is not about to take off.

Will these measures be enough? I suspect so as a considerable amount of time has been granted by policy-makers to banks to put these measures into place. However only recently Lord Myners suggested that the global deal on banks’ capital was ‘disappointing’. and did not push the financial institutions hard enough to become safer..

Having said that, I don’t think anybody wants to wipe out the banks ability to finance an economic recovery. But be under no illusions these measures will hurt and will remind banks they are under more scrutiny than ever before. This story is set to run…