[Please note that the views presented by individual contributors are not necessarily representative of the views of ATCA, which is neutral. ATCA conducts collective Socratic dialogue on global opportunities and threats.] The latest Basel proposals for the banking sector require far more capital to be raised -- well in excess of the capital already raised in response to The Great Unwind and The Great Reset. This is not going down well with the financial markets in parallel with the Volcker Rule. The Basel Committee's thoughts on capital and liquidity have many far reaching and critical implications for the entire global banking system and could be in force within a few years.
Bank for International Settlements, Basel, Switzerland
Under proposals from the Basel Committee -– which have been dubbed 'Basel III' –- banks will have to maintain a so-called core capital ratio of at least 6%. For many banks, capitalisation under Basel II is deemed very weak. Transition rules would give them time to fix the situation, but not a reprieve from the need to raise more equity. Overall, this could be particularly negative for the European banks. The European banking sector as a whole will have an aggregate extra funding requirement of more than one trillion euros, nearly one and a half trillion dollars, to comply with Basel III according to a number of projections from major financial institutions. The American banks' requirements are a lot less. Under changes to the Basel capital directive designed to improve the capital strength of big banks that have collectively lost hundreds of billions in the past few years, small to medium size brokers may also have to put aside a larger proportion of their turnover as a risk-capital buffer. European and American banks currently utilise either Basel I or Basel II. Those regulatory frameworks represent a colossal, decades-long effort at honing and perfection, with minimum capital requirements carefully calculated from detailed mathematical models and formulae. How helpful are those rules when recent history shows that the answers provided were completely wrong. Five days before the bankruptcy of Lehman Brothers in September 2008, it boasted a Basel-type “Tier 1” capital ratio of 11%, almost three times the regulatory minimum. When the share price collapsed, counter-party confidence ebbed away much faster than the capital adequacy ratio would suggest. When there is a 21st century stock market run on a publicly traded bank, capital adequacy ratios become marginalised. The Lehman Brothers bankruptcy, followed by the government led rescue of several high flyer banks, poses an obvious conundrum for the Basel-based bank supervisors: if they have already tried and failed to make capital rules foolproof via Basel I and Basel II, why should they do better this time with Basel III? Surely, they must not just worry about hurdles being too low, if the entire track has a tendency to get flooded from time to time. If the Basel Committee overreacts to the financial crisis and devises rules that are too strict, they may endanger the global recovery. Further, how can national supervisors deal with the basket-case banks, for which no reasonable buffer will be adequate? The Committee's "Basel III" proposal covers the following key points: 1. Tier 1 Capital Base
Raises the quality, consistency and transparency of the capital base. Some of the existing Tier 1 capital will be disqualified under the new rules. The new rules are intended to ensure that the banking system is in a better position to absorb losses on both a going concern and a gone concern basis. In addition to raising the quality of the Tier 1 capital base, the Committee is also harmonising the other elements of the capital structure. 2. Minimum Liquidity Standard
Introduces a global minimum liquidity standard for internationally active banks that includes a 30-day liquidity coverage ratio requirement...