Under terms that will be introduced to the G20 this fall to promote sound financial principles and economic recovery, banks would be required to hold capital worth 7 percent of assets. Authorities claim the Basel 3 time-table will allow a gradual phase-in of new requirements, but critics argue it only delays a real solution while protecting banks at the expense of clients and common sense. See the following article from HousingWire for more on this.
The Basel Committee on Banking Supervision adopted new standards for the capital requirements of the world’s largest financial firms, mandating the banks hold capital equal to 7% of assets.
As HousingWire reported in the Monday Morning Cup of Coffee, the committee increased the minimum common-equity requirement to 4.5% from 2% and stipulated banks hold a capital conservation buffer of 2.5% to withstand potential stress, raising the total common-equity requirement to 7%.
The changes further the committee’s imperatives laid out in July, and will be presented to the G20 leaders when they meet in Seoul in November. But the new laws aren’t set to take effect until the end of next year and will be phased in over the next nine years, which isn’t strict or timely enough for one economist.
“In other words, this is nonsense,” Dennis Gartman wrote in his daily letter on global capital markets. “In other words, nothing has been done requiring the banks to actually take action to shore up their balance sheets. In other words, the banking authorities punted the capital ball down the field to others to handle years into the future. In other words, this is almost comically silly.”
Gartman spoke to Bloomberg earlier Monday.
Others have chided Basel 3 initiatives as overly costly for clients. Although the committee believes it has established definitive standards to protect banks, clients and investors alike.
“The agreements reached [Sunday] are a fundamental strengthening of global capital standards,” Jean-Claude Trichet, president of the European Central Bank, said. “Their contribution to long-term financial stability and growth will be substantial. The transition arrangements will enable banks to meet the new standards while supporting the economic recovery.”
U.S. banking agencies support the new mandates approved Sunday by the G-10 Governors and Heads of Supervision.
Basel 3 “sets the stage for key regulatory changes to strengthen the capital and liquidity of internationally active banking organizations in the United States and around the world,” the Federal Reserve Board, the Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency said in a joint statement.
The federal agencies believe the implementation time line mitigates potential risk.
“This transition period is designed to give institutions the opportunity to implement the new prudential standards gradually over time,” the agencies said in the statement. “Thus alleviating the potential for associated short-term pressures on the cost and availability of credit to households and businesses.”
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