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Are new bank capital rules tough enough?

Robert Peston | 20:15 UK time, Sunday, 12 September 2010

The new international standards for how much capital banks need to hold, as a protection against losses, should have an important economic and cultural impact.

Even though banks are being forced to hold marginally less capital than British, US and Swiss regulators regard as ideally desirable, and the transition period for meeting the new rules is a lengthy eight years, there will nonetheless be a significant impact on banks' behaviour.

The amount of common equity (the best capital for absorbing losses) that banks have to hold will rise from 2 per cent of their loans and investments (or their assets weighted according to risk) to 7 per cent.

The 7 per cent includes a 2.5 per cent so-called "conservation buffer", which will be there to protect banks against periods of difficulty or stress.

And if banks' capital ratios fall below 7 per cent, regulators may place restrictions on their ability to pay dividends and bonuses.

That's not the end of the story in respect of new obligations on banks to hold funds in reserve for the proverbial rainy day or twister.

The biggest banks will be forced to hold an as-yet unspecified quantity of additional capital - or debt that automatically converts into capital in a crisis - because of the threat that the failure of a giant bank would pose to the integrity of the entire financial system.

And, what's more, central banks and the new breed of "macro-prudential" regulators will have the power to force banks to increase their core-equity capital ratios by a further 2.5 per cent, if there's evidence that banks in general are lending too much and economies are growing too fast in an unbalanced way.

This "counter-cyclical" buffer is distinct from the conservation buffer of 2.5 per cent. It is supposed to be the new tool that will allow the likes of the Bank of England's soon-to-be-created Financial Policy Committee to prevent property markets, for example, from becoming dangerously overheated (as happened in the US, UK, Spain and Ireland in the years running up to 2007).

A few other points are worth making:

1) The Basel Committee is hopeful that the long phased implementation, to Jan 1 2019, of the new capital requirements will deter banks from cutting back on lending to achieve the new ratios, in a way that could undermine economic recovery (to raise the ratio of capital to loans/investments, banks can either increase their stocks of capital or reduce their stocks of loans/investments).

2) The Basel Committee believes that smaller banks "for the most part" already meet the higher capital standards. It hopes this will reassure small businesses that their access to vital credit won't diminish, since it says that smaller banks are "particularly important for lending to" the small business sector. This is not true in the UK, where small businesses are dependent on big banks for credit.

3) A double whammy for the biggest universal banks - like Barclays, JP Morgan, Deutsche Bank and so on - is that the risk weightings attached to trading assets are massively increasing, which will have the effect of forcing banks which engage in a good deal of trading to raise disproportionately more capital (which could have the effect of shrinking their trading businesses).

4) Even UK and US banks, which have already accumulated a good deal of additional capital (much of it from taxpayers) since the crisis hit in 2008, will be under some pressure over the coming eight years to raise even more capital, because of the way that weightings attached to certain kinds of risky loans and investments are increasing.

5) If there is going to be disappointment with the new rules from banks' sternest critics, it will probably be that a new "leverage" ratio isn't tough enough. That leverage ratio will restrict the overall size of banks' balance sheets, with no weighting of assets for risk, to 30 times tier one capital (a measure that includes capital that is worse at absorbing losses than core equity tier one capital). A leverage ratio of 30 would mean that a bank whose assets fell in value by just a bit over 3 per cent - which is certainly not a once-in-a-millennium kind of event - would be bust.

Comments

  • Comment number 1.

    There must be strick rules on the bonuses for those actually engaged in the "casino banking" with it bonus spread over the term of any trading position.

  • Comment number 2.

    The biggest banks will be forced to hold an as-yet unspecified quantity of additional capital - or debt that automatically converts into capital in a crisis

    What kind of debt is that?
    Can you give an example Robert?
    Could we think of it as being similar to a loan (debt) to buy a huge diamond, a lovely huge diamond I can sell if I get into financial difficulties (now it is capital)?

  • Comment number 3.

    "It was said that there are 10 to the power of 11 stars in the galaxy. That used to be a huge number. But it's only a hundred billion. It's less than the national deficit! We used to call them astronomical numbers. Now we should call them economical numbers." Richard Feynman

    So how much capital actually needs to be accumulated by all the banks and does it exist on planet earth?

  • Comment number 4.

    Too little, too late.

    The problem has already moved onto sovereign debt. The USA is already, effectively, insolvent, only kept in business by residual practicalities associated with the $ past dominance.

    There is no sign of any real recovery in the US or many other developed economies past the peak of the currebt economic systems usefullness.

    Unemployment remains high and trending higher, inflation is way above wage inflation. Real interest rates outside of the banking sector that take into account actual risk are on the up. There is a dangerous stock market bubble, market capitilisation is massively above traditional multipliers on profits (except if you are a bank).

    They are doing agood job of using everything in thier pewer to hold back the tide but ultimately the raw force of the unsustainable nature of the current global economic model coupled with population growth will previal.

    I stopped paying into a pension fund.

  • Comment number 5.

    They should hit the new target in a month. If they fail all bonuses should be cancelled and the directors should all have to pay fines. Why do I say that? Well, working as I do in debt advice, I came across some one who had her overdraft confirmed at £2000 by her bank. She had had that limit for several years and never exceeded it. She got a letter 7 weeks later giving her a months notice that the limit was being dropped to £1300. They added that if she exceeded that limit she would be liable for the costs of an unauthorised overdraft. Banks don't give their customers time to adjust their finances so why should banks have that luxury, especially if the bankers can do it easily by not taking so much out of the business.

  • Comment number 6.

    The horse bolted about a decade ago and this is too little too late - however the depression that even these changes will cause will be bad.

    The problem is where we are, not how we go forward. The transition will be very hard. The problem is the need to de leverage the debt mountain without total destruction. I don't think it can be done without some destruction to the overly indebted. Banks have to regain prudence! They have lived on the basis of every diminishing prudence for decades and the change will kill them and us financially - but it must be done if we are to escape from the Great Depression that we are just entering.

    What I have written above means to individuals that their loans will be called in and their mortgage sum available reduced - forced re-mortgaging where you get less and pay more without the option. - Absolutely desperate if you are over-borrowed and this will lead to re-possession just like George Osborne's cuts. An inevitable and truly frightening prospect.

    Oh, and interest rates will inevitably go up as banks will want to make the same income by lending smaller capital sums as the did before when the lent larger sums - the reverse of what happened over the last decade. Get used to it, this is the new World order for the next 20 or so years. (The World has realised that being Japanese is impossible!!!)

  • Comment number 7.

    Wow Bob!...the Beeb are now advertising your new blog on News at 10!

  • Comment number 8.

    The right way to fix it on this iteration is to fine the bankers who presided over the credit crunch. That means Sir Greedie has a very short haircut, and not before time.

  • Comment number 9.

    Nothing long lasting is going to come from Basle III.
    It will go exactly the same way as Basle I and II.

    Private black box weighted average calculations of totally fatuous and artificially generated assessments of risk done by private bankers behind closed doors is going to do nothing for the average person in the UK.

    We need structural reform of the banking system.

  • Comment number 10.

    How people think the central banking system is creating monetary equality is beyond me, slaves to debt is all that results, created by constipated greedy born to rulers.

  • Comment number 11.

    8. At 10:37pm on 12 Sep 2010, Jacques Cartier

    I like the laws we have against drug dealers - all proceeds are confiscated. You know, flash cars, houses, boats etc.

    We all knew the situation would deteriorate when we just didn't hear cell doors slamming behind these buffoons.

  • Comment number 12.

    Here is a question Robert. What does Martin Khor of policy Innovations think of these new rules? ([Unsuitable/Broken URL removed by Moderator])

  • Comment number 13.

    Another way of looking at Mister Seven Percent is that he gives the banks an even greater margin in which to play the same games contriving to bring down global economies.

    Would it not have been better to strip them of any power, after all since when have the banks done anything for the greater good?

  • Comment number 14.

    Robert Peston.

    "The biggest banks will be forced to hold an as-yet unspecified quantity of additional capital - or debt that automatically converts into capital in a crisis - because of the threat that the failure of a giant bank would pose to the integrity of the entire financial system."

    Integrity:
    -- firm adherence to a code of especially moral or artistic values
    -- incorruptibility
    -- the quality or state of being complete or undivided completeness

    but the banks will not be stopped from doing business in dodgy 'tax havens'?

  • Comment number 15.


    13. At 00:18am on 13 Sep 2010, polly_gone wrote:

    Another way of looking at Mister Seven Percent is that he gives the banks an even greater margin in which to play the same games contriving to bring down global economies.

    Would it not have been better to strip them of any power, after all since when have the banks done anything for the greater good?




    Hmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmm



    RBS didlot for the greaterr Goodwin sir who got to no 1 at the top of the xhit parade with his remake of

    "If I ad a[b]n aaamro ,

    Id aaamro in the mawning

    I'd amro in the evening

    all over this laaand

    I'd aaamro out just 'its

    I'd aaamro out fee...dom

    I'd aaamro out the laaarf between my brokers and my sheisters

    woe owe owe owe

    woe owe owe owe



    If i ad abel

    I'd hammer out abel

    woe owe owe owe..............................................

  • Comment number 16.

    Labours Brown filled site for saaaw rise and hire ayes rolled out the red carpit for Captain black AAAdders fan queue and the Mr O....neons in flat tiers.

  • Comment number 17.

    15 spelling cowreckshun


    mawning .....mawningk


    evening ....eveningk

  • Comment number 18.

    And when Basel III fails to prevent a systemic banking crisis?

    Until there is some point at which money is fixed to tangible assets, like the Bretton Woods system did, despite its failings, this problem will occur in each generation. Not that this current one is finished of course.

  • Comment number 19.

    The only capital asset that i know of that can be instantly converted to liquidity/ cash is .......a laser printer plus nuffink [imported from the Arabs before oil]and localley produced oneupmanship.


    TIER won capital is a eupheminism for AAA [A3] laser printer [A4's to be reconned with later]

  • Comment number 20.

    Australian banks unfazed by tough new rules - Australian banks have avoided the need to raise additional funds as they easily meet the tough new rules on capital requirements set down by global regulators overnight.

    http://www.smh.com.au/business/local-banks-unfazed-by-tough-new-rules-20100913-157t9.html

    May have helped us totally avoid recession in Australia!

  • Comment number 21.

    One thing is for sure - we're still waiting to see the bankers go down for thier acts. This is our country, and we say what happens. We've made our choice, so make it happen. Bankers must suffer and be seen to suffer.

  • Comment number 22.

    @ 1. At 8:31pm on 12 Sep 2010, IR35_SURVIVOR wrote:

    > There must be strick rules on the bonuses for those
    > actually engaged in the "casino banking" with it bonus
    > spread over the term of any trading position.

    Fair enough, but we also need our slice of the action.
    We can tax thier gains, AND thier losses. That way, bankers
    pay whichever way it plays out.

  • Comment number 23.

    Isn't there supposed to be an implosion of debt based derivatives on the way created from exponential private money creation over the last 20 years?

    I don't really see how this is going help.

  • Comment number 24.

    What about derivatives and high frequency trading ? and the manipulation of the market. Google up Karl Denninger.

    financial charade :-

    http://globalresearch.ca/index.php?context=va&aid=20853

    To the unions perhaps you just need to sit back, wait and maybe look at constructing your own bank (not based on FRB and debt servitude and derivatives)
    There must be an orderly considered removal from the monsters of greed.

  • Comment number 25.

    You would have thought that with such austerity about to the the banks that it might be reflected in their shares prices this morning.

    Oh so it is. Up 3% all round. Happy days.

  • Comment number 26.

    20. At 06:43am on 13 Sep 2010, Brit-in-Oz wrote:
    May have helped us totally avoid recession in Australia!

    Am I correct in thinking that monetarism in Australia is heavily influenced by Bill Mitchell ?

  • Comment number 27.

    I've been struggling with asset value since #RiskAnalyst posted this a few days ago.

    'Ultimately, something is only worth what someone is willing to pay for it. No model can accurately capture this logic.'

    If the only way to assign a value to an asset is to trade it for another and the value assigned is a reflection of the unique conditions of the market that existed at that time then how do you determine value for an asset you want to hang onto ?

    Past history is no guarantee of future success.

    #RP 'A leverage ratio of 30 would mean that a bank whose assets fell in value by just a bit over 3 per cent - which is certainly not a once-in-a-millennium kind of event - would be bust'

    Assets are valued in relation to something else, this something else is valued likewise, how can we tell if an asset by value has varied by any percentage if the valuation process itself is circular ?



  • Comment number 28.

    "A leverage ratio of 30 would mean that a bank whose assets fell in value by just a bit over 3 per cent - which is certainly not a once-in-a-millennium kind of event - would be bust."
    ===========

    So fundamentally the banks have been kind enough to consent to rules which offer no real protection against the kind of destruction the banks just caused to the economy?

    I also note the report that bonuses are back to pre-crash levels.

    A big well done 'I told you so' to anyone on here who predicted 'no change' as the likely outcome to all the rhetoric about tough regulation.

  • Comment number 29.

    . At 07:57am on 13 Sep 2010, Jacques Cartier wrote:
    "....we also need our slice of the action.
    We can tax thier gains, AND thier losses. That way, bankers
    pay whichever way it plays out. "
    ==================

    I agree with your principle - we need a style of thinking which squeezes the banks till the pips squeal. Just like they do with customers. Screw them to the absolute limit where they might go elsewhere, then wait for another opportunity where they are vulnerable and extract some more.

    Given the extent to which the current government is payrolled by these same people, I will not hold my breath waiting for this approach.

  • Comment number 30.

    Rita, you are on brilliant form! Wheeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeee!

  • Comment number 31.

    1. At 8:31pm on 12 Sep 2010, IR35_SURVIVOR wrote:
    There must be strick rules on the bonuses for those actually engaged in the "casino banking" with it bonus spread over the term of any trading position.
    -----------------------------------------------------------------------
    Have you thought that one thru'? Do you really mean that?

    Weekly bonuses? Overnight bonuses? Daily £1m bonuses?

    That's gonna be popular with some but a lot of people will hate it! There really will be a revolution in Hendon the day after .....

    Hey! Let's be careful out there, today.

  • Comment number 32.

    8. At 10:37pm on 12 Sep 2010, Jacques Cartier wrote:
    The right way to fix it on this iteration is to fine the bankers who presided over the credit crunch. That means Sir Greedie has a very short haircut, and not before time.

    -------------------------------------------------------------------------
    For once, mon ami mate, I could almost agree with you. Only two done in the UK so far, if my memory serves me well.

    But what about the others, not bankers, who were equally at fault?

  • Comment number 33.

    32. At 09:26am on 13 Sep 2010, Up2snuff wrote:

    But what about the others, not bankers, who were equally at fault?
    =========================================

    http://www.bbc.co.uk/blogs/seealso/2010/06/daily_view_bilderberg_group_co.html

    what about these guys?

  • Comment number 34.

    #2 I would guess that Robert is referring to some form of convertible (possibly subordinated) loan stock where the bank rather than the stock holder has the right to force conversion into some form of equity or possibly that the loan stock is not repayable until all other creditors are repaid.

    Mind you that is just a guess.

    "A leverage ratio of 30 would mean that a bank whose assets fell in value by just a bit over 3 per cent - which is certainly not a once-in-a-millennium kind of event - would be bust"

    There are two points to make about this:

    1) This proves that a leverage ratio of 30x is entirely inappropriate and something closer to 10x is right

    2) With mark-to-market accounting as a requirement all banks would be bust. Mark to market accounting is entirely correct for trading assets but not for loans which banks intend to hold to maturity. This has to be changed because (as was pointed out by many people when mark-to-market accounting was introduced ) mark to market accounting does two things, it increases the volatility of the bank's P&L in a way which bears no relationship to reality and secondly actively encouraged/forces all banks to trade their loan book. The latter point being particularly bad because it also means banks have no commercial interest in knowing and understanding their customer properly

  • Comment number 35.

    #6. John_from_Hendon

    John, it isn't going to happen how you want it to. why? Manipulation, manipulation, manipulation. Rules will be bent, changed, broken and abolished to prevent systematic collapse. In the end the collapse will come whatever happens and it will be total.

    Also do you honestly think 30% - 40% of the population will accept being sold a delusion then get kicked onto the streets by government policy. Poll Tax was enough to tip a usually ambivalent populace over the edge into street riots, total financial ruin en masse by what is perceived as government actions and we're in revolution territory.

    I've said before, we're on new ground here, new ideas are required not application of old ones with disregard to the consequences if we're going to survive this. However, I doubt any ideas will stave off what's coming as we've reached end point. Without doubt worldwide policy at the moment is to tread water more in hope than certainty of the outcome, why else would austerity and QE be on everyones lips, they are contradictory unless you're deliberately trying to manipulate the system. I also agree deleveraging all debt is necessary but I expect this will be attempted to be done by passage of time with the withdrawal of easy credit not short sharp shock treatment, it just doesn't win any votes and power is everything to politicians. This is why we're being hammered now in the hope a few "Budget softeners" will be available to win the next election - some hope.

    Look at the perception, banks gamble - banks lose - worldwide financial collapse - governments already running deficits - governments bail out banks - governments amass larger deficits/debts - banks back in profit (yeah sure) - government cuts spending - job losses - bankers pay bonuses - people lose homes - bankers pay bonuses- more government cuts - more people lose homes. Do you think mortgage recalls will go down well on top of this? It may happen anyway, it may not, this is where some new thinking has to be applied or we're going to be building redoubts, fortified garden walls with ramparts, firing steps and seige stores.

    You and I know the whole problem is not solely down to banks but also government deficits, the markets, debt, rating agencies and the sudden need to appease them all but that's not how Joe Public sees it. As far as they know life was "cushty" then the banks took all their money. One disadvantage of gradual dumbing down of the populace, something on which I have a far longer and more extreme theory.

  • Comment number 36.

    #31 the bonus must be though through too, what I mean I guess it that all the trades have to be fully settled for the bonus to be obtained, it maybe that it has to be spread over years and if the bank goes down it is lost so they have an incentive to make sure other members are no being "foolish too"

  • Comment number 37.

    33. At 09:50am on 13 Sep 2010, 24law wrote:
    32. At 09:26am on 13 Sep 2010, Up2snuff wrote:

    But what about the others, not bankers, who were equally at fault?
    =========================================

    http://www.bbc.co.uk/blogs/seealso/2010/06/daily_view_bilderberg_group_co.html

    what about these guys?
    -------------------------------------------------------------------------
    Aah! The summer Davos!

  • Comment number 38.

    re #36
    Not an expert on trading and somewhat out of touch with City life but ...
    Most traders, I would have thought, will not have an open position on anything much overnight, let alone for several days unless they are supremely confident that that the market will go the way of that position. And probably would OK it with their immediate boss.

    They are controlled in what they do, especially post-Leeson, and the guy or gal who controls them also gets a bonus depending on the success of his or her team. [And so on up the food chain.] The job of each trader is purely to make a profit. No moral judgements. No emotional or philosophical tie in to the way the market might go. Got a customer. Read the situation. Go buy or sell. Make money doing it. Do not make losses.

    On a slightly different note, if you are saying that our current bonus culture is not good and can lead to all sorts of abuses, then I agree fully with you.

    How to tackle it is another question. Alastair Darling had a golden opportunity and the moral position and momentum to do something tax-wise at the end of '08 and in spring '09 but he bottled it. Not sure it's on GO's agenda.

    Does GO have an agenda?

 

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