Basel III

Claire Jones

Austria on Monday became the first country in the eurozone, and one of only a handful across the globe, to say it would fast track compliance with the Basel III capital rules.

With a eurozone recession imminent and Austrian lenders exposed to woes further east, it appears odd to heap pressure on banks to comply with rules six years ahead of their rivals elsewhere.

To boot, Austria will also introduce an additional capital buffer early. And the buffer will be set between 2-3 per cent dependent on the risks inherent in banks’ business models, higher than the 1-2.5 per cent specified in the Basel III framework.

Is Austria getting too tough too soon?

Claire Jones

Credit rating agencies haven’t had a good crisis. But central bankers’ and regulators’ frequent barbs seem a touch hypocritical when one considers how much they rely on them.

Both in determining which assets are eligible as collateral for open-market operations, and the risk weights for regulations, the big-three rating agencies play a fundamental role.

In the United States, that’s set to change. Under Dodd-Frank, the US authorities must remove credit rating references and requirements from their regulations.

The Securities and Exchange Commission has now done so. And on Wednesday, the Federal Reserve’s Mark van der Weide said the central bank was examining three possible alternatives to replace the use of ratings in its risk-based capital rules. Read more >>

Claire Jones

The European Union today became the first jurisdiction to unveil proposals on how it intends to beef up its banks’ capital and liquidity buffers.

In terms of capital, the measures put European banks in line with Basel III in requiring them to hold common equity tier 1 capital of 4.5 per cent and total tier 1 capital of 6 per cent, up from 2 per cent and 4 per cent under the current regulatory regime.

That means the continent’s banks must raise a whopping €460bn in capital by 2019. Either that or shrink their balance sheets and shed risky assets.

But hold the applause. According to the IMF, this might not be enough.   Read more >>

Claire Jones

Brazilian finance minister Guido Mantega’s distaste for QE2 is well known. The Federal Reserve may have decided to give Brasilia a little of its own medicine, however.

Research published on the Fed’s website over the weekend takes aim at Brazil’s use of reserve requirements – the proportion of a bank’s reserves that they are required to park at the central bank – as a tool to manage liquidity.

The use of reserve requirements for this purpose (rather than to combat inflation, as is usually the case), is especially pertinent at the moment given that the Liquidity Coverage Ratio has become one of the more controversial aspects of Basel III. Read more >>

Chris Giles

Yes. As Angela Knight, chief executive of the British Bankers’ Association says:

“A bank is like any other business – if its fixed operating costs go up then so does the price of its product. All the changes are good from a stability perspective but add billions to the fixed operating cost of a bank. The consequence is that inevitably the cost of credit – the price the borrower pays for money – will rise. The cheap money era is over.”

But I am sure Ms Knight, as a skilled lobbyist, knows that being strictly correct can happily coexist with being seriously misleading. The impression she gives is that tighter capital and liquidity standards will hit households hard through dearer credit and it is all the fault of pesky regulators. There are two big problems with this: first, the costs of tighter capital standards are only important relative to the benefits; second, the scale of the costs is more important than their existence.

Costs and benefits

Basel attendees have effectively raised the tier one capital ratio from 2 to 7 per cent. The package, popularly known as Basel III, sets a new ratio of 4.5 per cent, but also sets a buffer of 2.5 per cent, setting an effective buffer of 7 per cent. (Banks with capital ratios falling between 4.5 and 7 per cent will face restrictions on paying dividends and discretionary bonuses.) Changes will not be entirely phased in till 2019.

Had the stress tests required 7 per cent, rather than 6 per cent, 17 more European banks would have failed under the adverse scenario with sovereign shock (see column T1_AdvS, below). These are almost exclusively PIIGS banks – except for one Slovenian bank, and two German banks (Norddeutsche and Deutsche Postbank). Read more >>