THE BASEL III reforms have now been formally endorsed by the Group of Governors and Heads of Supervision of the G20 countries. The aim is for the proposals to be agreed in November 2010 and to take effect from 1 January 2013 – albeit with long transitional periods.
Under the reforms, banks will now need to hold up to 4.5 per cent core tier one capital made up of shares and retained earnings by 2015, and a cushion of up to 2.5 per cent (up to 7 per cent in total) between 2016 and 2019. Significant banks will need to hold more capital, thought to be around 10 per cent core tier one.
Also included in the reforms is a leverage ratio of 3 per cent of unweighted assets imposed to prevent excessive trading (a test phase will end in 2017) and a requirement to maintain a liquidity cushion made up of high-quality sovereign debt and corporate bonds, with applicable cuts, to allow banks to survive acute stress scenarios lasting one month.
These requirements may not look that high. However, the costs of meeting them will be, which will impact on the availability and costs of lending. The long transitional periods are unfortunate and it is conceivable that there may be another crisis before the reforms are implemented – as well as a danger that the laws will become fragmented in the interim.
Germany has won a 10-year transitional period to meet the requirements due to the fact that its “silent participations” would no longer be able to be used to meet the test. It is likely that without this transitional period, Germany would not have signed up to the proposals.
The UK wanted higher capital requirements from the reforms and has stated that it intends to impose the full 2.5 per cent cushion, as well as higher capital requirements than those proposed by the Basel Committee.
In addition to being potentially harmful to competition, it is questionable whether the UK will be able to impose higher capital requirements than Basel when the Capital Requirements Directive 4 reforms (CRD4 reforms) are implemented.
There is a definite move toward full harmonisation of rules within Europe and it is becoming more difficult to goldplate. We should expect the UK to fall in line with the rest of Europe when CRD4 is implemented.
A concern for Europe is that all the proposals for reform are amendments to the Basel Accord, which is a voluntary accord – and therefore does not have any teeth. As the accord and amendments to it are made mandatory in the EU for all banks and investment firms, it is important that all the G20 countries commit to implementing the reforms within the deadlines; otherwise competition will be adversely affected in the EU.
While the US has committed to the reforms and the Basel III reforms are either set out or provided for in the Dodd Frank Act, there is concern with Asia, as Japan and China did not implement the Basel II reforms and Singapore is not a member of the G20.
The leverage ratio, capital requirements and capital cushions in the reforms should all help to prevent another crisis; however, it is important that all the G20 countries move together in order to provide a global solution to what is a global crisis and to prevent regulatory arbitrage.