The Basel regulators say the world’s largest banks will have to hold more Tier 1 capital.
Regulators meeting in Basel over the past weekend agreed to capital measures that will force more than two dozen of the world’s biggest banks to hold up to 2.5 percentage points more capital than the 7 percent core Tier 1 capital required. The measures are intended to strengthen bank balance sheets so that systemically important banks don’t collapse during a financial crisis.
On Saturday the Group of Governors and Heads of Supervision (GHOS), which is the oversight body of the Basel Committee on Banking Supervision, agreed to the measures requiring the world’s largest banks to hold common equity Tier 1 capital ranging from 1 percent to 2.5 percent, “depending on a bank’s systemic importance.” The measures are intended to “provide a disincentive for banks facing the highest charge to increase materially their global systemic importance in the future, an additional 1 percent surcharge would be applied in such circumstances.”
For treasurers, this will surely raise the cost of doing business as banks pass on the cost burdens to their corporate clients – a shared view of most members of The NeuGroup peer group universe. That’s because the reengineering of bank balance sheets could create credit scarcity, thus corporates can expect to pay more for bank credit. This will eventually force treasurers down other, more attractive funding paths. These including tapping the capital markets and squeezing as much as possible out of working capital enhancement projects.
Trade finance in jeopardy?
One area treasurers should pay close attention to is trade finance. That’s because this type of funding arrangement will be perhaps unfairly penalized because of the capital requirements. As such, corporates should find out which of their banking providers are committed to this service and which might seek to limit it or even outsource it to other providers.
Other banks costs could come from the fact that many banks have invested heavily in payment platforms and other technology and so are seeking a return on capital. Look for a wave of visits and calls as banks pitch payment services to make sure they can recover some of that investment.
Now for review
The proposals will be reviewed by the Financial Stability Board (FSB) and then be issued for public comment, according to the Basel committee. The FSB, which is a group of finance ministry officials, central bank governors and regulators from the Group of 20 countries, has been leading efforts to rein in systemically important banks.