New bank capital rules
Last updated: September 13 2010 19:06
“Give me chastity and continence, but not yet.” Bank regulators seem to understand the sentiment of the youthful St Augustine. The post-crisis Basel III capital standards delay banks’ day of mortification.
For banks, this is good news. The minimum ratio of core tier one capital to risk-weighted assets will be 7 per cent, a widely expected relative leniency. But the deadline was not the expected 2012. Instead, banks have until January 1 2019 until all Basel III’s counter-cyclical provisions come into force.
Eight years is a long time in finance. It was enough to encompass the peak of the Nasdaq bubble in 2000, a bear market in equities, a bubble in credit and the implosion of Bear Stearns in 2008. Barring another crisis, the grace period should run long enough to let banks make profits out of the assets that currently sit on their balance sheets as tax offsets from losses.
“Give me chastity and continence, but not yet.” Bank regulators seem to understand the sentiment of the youthful St Augustine. The post-crisis Basel III capital standards delay banks’ day of mortification.
For banks, this is good news. The minimum ratio of core tier one capital to risk-weighted assets will be 7 per cent, a widely expected relative leniency. But the deadline was not the expected 2012. Instead, banks have until January 1 2019 until all Basel III’s counter-cyclical provisions come into force.
Eight years is a long time in finance. It was enough to encompass the peak of the Nasdaq bubble in 2000, a bear market in equities, a bubble in credit and the implosion of Bear Stearns in 2008. Barring another crisis, the grace period should run long enough to let banks make profits out of the assets that currently sit on their balance sheets as tax offsets from losses.
Whatever the regulators’ intentions for the distant future, since last spring they have been committed to helping their charges muddle through.
A tougher group would have forced banks, which took extraordinary profits during the credit bubble, to take immediate writedowns of their assets. Instead, the banks are using the profits from exceptionally low rates – created for banks by governments – to replenish capital month by month. Basel III represents the culmination of this policy.
But it is a risky gambit. If the high profitability continues, banks will not feel the need to apply the birch twigs to risky trading desks nor rein in sinful pay packets.
Shorter term, regulatory forbearance is positive for bank shares. Credit Suisse suggests that banks at the two ends of the capitalisation spectrum will benefit most. The strongest might soon start returning capital to shareholders, while the weakest will gain most from the long grace period.
Regulatory uncertainty has helped keep bank shares globally trading in a range for about 12 months. This news might well be enough to jolt them upward.
Copyright The Financial Times Limited 2010
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