LEADING BANKERS in Britain, the US and Switzerland are prepared for national regulators to impose tougher capital requirements than those required by last Sunday’s global agreement, even as investors bid up bank shares on relief that the standards were not more rigorous.
The 27 member countries of the Basel Committee on Banking Supervision agreed on Sunday that banks will in effect be required to triple core tier one capital ratios from 2 per cent to 7 per cent by 2019. This ratio measures the buffer of highest-quality assets that banks hold against future losses. The agreement was hailed by regulators and industry groups as a vital step that would go a long way towards preventing a repeat of the fiscal crisis without endangering the nascent recovery.
Investors welcomed the agreement, sending bank shares higher. Those banks considered to be the best capitalised gained the most, including France’s Société Générale and JPMorgan of the US.
But critics complained that the capital definitions, timetable and overall ratio had been watered down to win over Germany and others. They also warned that putting off new rules on liquidity standards until 2015 could endanger the financial system.
“The regulators appear to have given in to pressure from the banking industry. I do not think the core tier one ratio is high enough to cope with another similar downturn,” said Jacqui Hatfield, regulatory lawyer at Reed Smith.
The long timetable and the frank admission by some countries that they would have liked tougher standards have awakened concerns about unequal implementation and regulatory arbitrage.
Global banks on Wall Street, in London and Switzerland fear they will face the toughest rules. They point to the “Swiss finish” that regulators there have traditionally applied on top of global standards and Britain’s willingness to be tougher on other issues, such as pay. They also said US regulators were likely to consider shorter timetables and may face pressure from Congress to be tougher.
Many banks will now need to look to raising funds. In Europe, “it will be hundreds of billions” [of euro], European Central Bank governing council member Nout Wellink said. “Partly they will have to retain profit for years which they cannot use to pay shareholders or bonuses,” said Mr Wellink, who heads the Dutch central bank.
That sets up a potential conflict with investors, who are already pushing the best capitalised western banks to consider share buy-backs and higher dividends.
Though analysts called the agreement “benign”, German public sector banks said the deal risked harming the German economy because they would have to add capital too quickly. – (Copyright The Financial Times Limited 2010)
