Are new bank capital rules tough enough?
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.