What Basel means for banks

What Basel means for banks :

Basel III is just a beginning is going to require a lot more work before it becomes a meaningful worldwide standard for banks.
Twenty-two years after the first set of global capital rules for banks were set, very few people seem to have any idea why they were fixed where they were.

Stories vary, but in the end it is hard to avoid the impression that the rules now known as Basel I, despite six years of preparation, were the result of anything more than some very illustrious hands plucking figures from the air.
Step forward to 2010, and this weekend, again in the Swiss city of Basel, a small group of the world's most important central bankers and regulators sat down to agree the first changes to the capital ratios for banks since Basel I 1988.
Sunday's announcement of the Basel III capital ratios for the banking industry caused few surprises, with leaks on what would be agreed appearing daily in the week leading up to the meeting.
Despite the ratcheting up of core Tier 1 ratios from 2pc to 7pc, the large increase was met with a sense of relief by the markets.
That a more than trebling in the level of the main loss buffers of banks could be met with relative equanimity says much for the widespread fears that had pervaded the markets of much tougher rules.
The response also pointed to the fact that many banks already maintain capital ratios far in excess of the old minimum requirement and well-above the new levels.
Take Britain's largest banks, none of which at the end of the first half of this year had a core Tier 1 ratio below 9pc, which according to some estimates suggests UK banks have about £17bn of excess capital.
For equity analysts, who in recent months had been playing a guessing game of how much extra money banks would need to raise to meet Basel III, the figures were greeted as a chance to speculate about possible share buybacks.
Morgan Stanley analysts suggested banks from Switzerland to the US might move quickly to begin returning surplus funds to investors.
Credit analysts, by nature more pessimistic people than their equity counterparts, dismissed as ludicrous the idea that banks that only two years ago were on deaths door returning large sums of money to shareholders.
"There is still a lot of uncertainty about how the regulations will be implemented," said Simon Adamson, a banks analyst at CreditSights.
"There seems little likelihood regulators would want to see banks handing large amounts of money to their investors."
Mr Adamson's views are echoed by others, who say that until the final rules are agreed at the November meeting of the G20 in Seoul there is still much that is unknown.
Take the 'too big too fail' banks, or "systemically important" institutions as the Basel communique describes them.
Large domestic and international banks could still be subject to an additional capital charge that could add as much as 4pc to the capital ratios they are required to maintain.
Add to this the still to be set liquidity targets for banks and the future treatment of junior and more exotic forms of debt issued by banks and you have a recipe for more uncertainty with major changes ahead in the ways banks structure their balance sheets and fund themselves.
In the short-term, the consequence of Basel III, as outlined so far, is to end the uncertainty about what levels of capital banks should maintain, but at the same time it has pretty much shut the door on banks issuing non-senior debt.
Contingent convertibles, more commonly known as "co-cos", along with bail-in bonds, could become a major source of new funding for the banks, which have only experimented with them on an ad-hoc basis.
"What you are likely to see is the creation of an entirely new asset class," said one senior London-based banker.
Ultimately, like its predecessors, Basel III is just a beginning, and like Basel I, which did much to begin the global process of harmonising bank capital standards, the latest iteration is going to require a lot more work before it becomes a meaningful worldwide standard.