beyondbrics

Although the debate over new capital reserve rules at the Basel Committee on Banking Supervision has been dominated by fights between the US and Swiss on the one hand and Germany on the other, the global standards announced on Sunday apply worldwide and could affect the long-term shape of banking in emerging markets.

The committee said banks must hold core tier one capital equivalent to 4.5 per cent of their assets, adjusted for risk, plus an additional 2.5 per cent to avoid restrictions on dividends and bonuses. The rules known as Basel III also require banks to stop using hybrid capital and deduct a bunch of things, including deferred tax assets and mortgage servicing rights, from their capital totals.

These requirements will not be onerous for many emerging market banks. As of last week, most of the big banks in India and China held core tier one ratios well above 9 per cent, and deductions were not expected to shave more than about 1 per cent off their totals.

Hybrid capital has not caught on widely either. The Basel committee has already modified a deduction that was particularly problematic for countries such as Brazil that require global overseas banks to take on local partners.

The new capital rules would have penalised banks that operate in this fashion by stripping the equity held by the local partners from their tier one capital totals. But the committee agreed on a compromise in July.

Another part of the Basel III package could prove be more onerous, as it requires banks to hold enough cash and government bonds to get them through a 30-day market crisis.

This “liquidity coverage ratio” is problematic for banks in countries without liquid government bond markets.

The Basel group agreed on Sunday to make the liquidity coverage ratio “observational” until 2015 and promised to “review the implications of these standards for financial markets, credit extension and economic growth, addressing unintended consequences as necessary”.