New Basel III bank capital rules not as onerous as feared; little change for companies looking for credit.
Global bank regulators this weekend agreed to stricter capital rules for banks going forward, but many in the banking sector are, to borrow a phrase, laughing all the way to the bank. In a nutshell, the rules are not only somewhat light, but also will be eased in over eight or more years. Granted, the rules do ultimately more than triple the amount of capital a bank must hold against losses but the timeline will make it much easier to build up the required amounts.
The agreement isn’t good news for those hoping the rules would be tougher. But for corporate treasurers, particularly those in Europe where companies rely more on bank lending, it’s good news. That’s because corporate lending practices likely won’t change immediately; and any changes that do take place will be gradual. There were some fears ahead of the agreement that banks would get more conservative with lending practices. But this is likely not going to happen with the rules as they currently stand.
In its effort to rein in risky behavior that led to the financial crisis, the Basel Committee said its rules increase the minimum common equity requirement from 2 percent to 4.5 percent. In addition, banks will be required to hold a “capital conservation buffer” of 2.5 percent to withstand future shocks, which will bring the total common equity requirements to 7 percent. The Committee hopes this level “reinforces the stronger definition of capital” agreed to in July and the higher capital requirements for trading, derivative and securitization activities to be introduced at the end of 2011.
According to the Committee’s proposed timeline, some changes will go into effect as soon as 2013, but others won’t be in place until the beginning of 2019. Technical changes to the definitions of capital won’t be fully in place until 2023.
The Basel Committee’s weekend agreement comes on the heels of a recent consultative paper, Proposal to ensure the loss absorbency of regulatory capital at the point of non-viability (see related story here), which is part of its larger attempt at strengthening banks’ capital structures.