Regulators are pushing for early adoption of Basel III; tech spend will also increase to comply with new rules.
Just about daily there is news of some new fee, fine or rule that banks say will hurt their bottom line. Just this week several banks reporting their earnings warned that new Basel III capital requirements will reduce their return on equity (see related story here).
Now today are reports that world regulators want banks to phase in Basel III sooner than later. On top of this, many banks will have to spend millions on new technology to comply with the Basel rules.
According to Reuters, which is hosting a Future Face of Finance Summit – a several-day rolling financial conference in Washington, DC, New York, London and Hong Kong – regulators said they do not want banks to wait for the 2013-2019 timeframe to start instituting Basel III capital rules. The Basel III capital requirements aim to make sure banks have enough capital in the event of a crisis – i.e., the ability “to absorb losses in the event that a bank is unable to support itself in the private market,” as the Basel Committee put it. The requirements also take the public off the hook in case of a failure.
European Banking Authority Chairman Andrea Enria, speaking at the Reuters summit, said there “needs to be more capital, less leverage, more liquidity buffers and a tougher regime on deductions from capital,” Enria said. While he didn’t explicitly say “now,” the tone of others at the conference, including Federal Deposit Insurance Corporation Chairman Sheila Bair, was more straightforward. “Having an early phase-in of those capital requirements would suit me just fine,” Ms. Bair said, according to Reuters.
Tech spendMeanwhile, some banks may have to ramp up technology spending to meet the new requirements. While this is good news for tech vendors, it could mean less cash to lend. Jamuna Ravi, who is VP, banking and capital markets, at Infosys, writes that banks “now need to assess the impact Basel III will have on their existing IT infrastructure and review the technology investment, which is needed to be compliant.”
“The technology investment required to comply with Basel III will largely depend on the level of investment made by a bank to meet Basel II regulations,” Ms. Ravi writes. The more up-to-date a bank is in terms of risk-management and measurement systems, the less they will have to spend to comply with the solvency aspect of Basel III. “However, to meet the ‘liquidity’ element of the Basel III regulation, the investment could be much higher.” For the UK, estimates are around £500 million, she said.
Again, banks, dealing with Dodd-Frank, Basel II and III and various fees like the new Balance Sheet Levy in the UK, might begin feeling the need to put their resources elsewhere instead of into lending. Or else just hold onto the cash until the regulatory dust settles.