Is the G20 set to soften bank capital and liquidity rule changes?
Banks will put statements from this weekend’s G20 meeting under a microscope as they look to guide their expectations on coming regulations. Of particular interest will be the severity level of capital and liquidity rule changes and how quickly they will need to be implemented. Press accounts leading into the weekend suggested that the G20 finance ministers, meeting in Seoul, were set to delay implementation of the proposed Basel III rules—and even tweak definitions of regulatory capital.
Is this really news?
This could be much ado about nothing. The consensus expectation has already been that banks should be given adequate time to adjust to the new rules. For example, if hybrids like trust preferred are to be excluded from Tier 1 capital, then banks should be given several years, at least, to raise new capital and phase them out. As for the question of delay, most bankers would like to get some certainty as to what the rules will be, so they can begin their capital and strategic planning.
However, that’s not to say that bankers won’t be praying for relief from some of the more onerous provisions of Basel’s capital and liquidity proposals and they may take a few months more of uncertainty to get it. As examples:
For liquidity
• Deposit run-off and line draw-down assumptions
• Bias toward wholesale funding
• Disruptive of repo-funding (mainstay of investment banking)
• Bias against agency MBS holdings
• Liquidity coverage ratio, liquid asset definition and net stable funding metrics too restrictive
For capital:
• Unfair to disallow trust preferreds as tier 1 capital, but continue to allow hybrids that achieve tax deductibility in Europe
• MSR deduction from tier 1 capital
• No adjustments for unrealized gains/losses (OCI) for regulatory capital purposes
• Reflect netting in leverage ratios
• Regulatory capital requirements on OTC derivatives (even for exempt clients, like corporates) that are executed bilaterally.
• Individual bank risk should be a consideration in buffer requirements.
Next week will reveal what whether the G20 officials are going to let bank lobbying and renewed concerns about banks’ ability to respond to new requirements (especially in light of the situation in Europe) weaken the prospect for Basel III implementation as laid out currently. Delayed implementation beyond 2012 is one thing, but foot-dragging by the political class that leads to prolonged uncertainty may be unwise if financial order is ever to be restored. If, as many are saying, financial regulations will unavoidably alter the business of banking in a fundamental way, they might as well get on with the transition.