Views On Basel III
The new banking regulations, known as Basel III, which are to be a safety net in case of future financial crisis could limit lending, at least on a short term.
Banking authorities around the world and representatives of the most powerful Central Banks reunited last weekend in the Swiss city of Basel decided that banks must detain higher capital reserves in order to not repeat the scenario that led to the financial crisis which broke out in the autumn 2008.
Given, however, that banks will have to set aside more money, the volume of loans could decline, according to BBC News.
“It may be possible that even the interest rate is affected and banks could grant fewer loans. Both for commercial banks and investment banks, the short-term risk would be if something was to be implemented that should have been analyzed more carefully and on a longer period of time “said an economist, concerned about the Basel III implications and about the fact that the program may not have been well-planned.
Some creditors even fear that the new regulations could trigger a new loan crisis.
On the other hand, the banking authorities argue that their application will over a period of several years, so there is no danger that the economic recovery could be in jeopardy.
“We must take into account several elements, most importantly, the economic context in which regulations apply, slow and uncertain recovery. Basel III increases uncertainty, because its area of impact is vast. There have been several studies: some have found that the impact on GDP will be reduced, others show that it will be more significant. It is very important how the regulations will be implemented, given that Basel III does not distinguish between conventional banks, commercial and those who have financial engineers, “explains the concerned economist.
Banks will have to have capital reserves of high quality equivalent to 7% of total assets in the portfolio, including a conservation reserve of 2.5% capital to further eliminate turbulence. Creditors who fail to build this reserve latter will no longer be able to pay dividends, even if they are not obliged to raise money to provide the reserve for conservation. “There are substantial changes in terms of capital requirements. The period of adjustment to these rules is high, which means that some of the pressure disappears. But even so, who would want to own a bank that cannot pay its dividends for, say, three years? “said James Wiener, director of the finance and risk department at the consulting firm Oliver Wyman.
And capital requirements of type Tier 1 will be increased to 6%, while the core capital (Core Tier 1) was set at 4.5%.
European banks may be more disadvantaged than the U.S. banks with the adoption of Basel III, since they are less capitalized, according to Bloomberg. The ten largest German banks, including Deutsche Bank and Commerzbank, may need additional capital amounted to 105 billion euros given the new regulations, the German Banks Association estimated. By contrast, banks such as Credit Suisse expect Basel III not to have any effect on their strategies, following to implement the new regulations “without changing our growth plans and our current policy on capital and dividends”.
G20 leaders (the group of the largest20 industrialized and emerging countries), who insisted on an international banking reform, is to agree on the new regulations Basel III during the Summit in Seoul, which will take place in November.11