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Will new Basel rules lead to bonus shrinkage?

Robert Peston | 17:50 UK time, Sunday, 12 September 2010

An important milestone has been reached in the reform of the banking system to correct at least some of the palpable flaws that contributed to the worst banking crisis since the 1930s.

Financial regulators and central bankers, the so-called governors' group of the Basel Committee on Banking Supervision, have agreed new global rules for the amount of capital and liquid resources that banks must hold.

A statement should be issued by the Commitee later this evening.

These new rules - which were presented to the governors as a "take-it-or-leave-it" package after negotiations carried out by their officials a few days ago - are intended to protect banks when they make losses and also provide them with insulation against runs.

As I disclosed last week, perhaps the most important and eye-catching change will be an increase in the amount of common equity - known as core Tier One capital - that banks have to hold.

This will rise from 2 per cent of risk-weighted assets (loans and investments) to 7 per cent. And this 7 per cent will include a "buffer" of 2.5 per cent, which can be eaten into in extreme circumstances.

Put simply, the reform ought to mean that banks will have greater ability to absorb losses in future crises without going cap in hand to taxpayers.

But because capital is typically expensive for banks to raise, it may mean that banks progressively increase what they charge for credit and increase the provision of credit at a slower rate.

Central bankers, politicians and borrowers may well point out to banks that an alternative way of financing the cost of servicing increased capital requirements would be to slash the remuneration and bonuses of bankers.

They'll also point out to bankers who may squeal that the new capital rules will be increased in stages from 2013 to 2018, which gives them plenty of time to build up reserves through retaining earnings and selling shares to investors.

That said, it's striking that Deutsche Bank has today announced an anticipatory issue of €9.8bn of new shares - which will both strengthen its balance sheet and help to pay for the 70 per cent of Deutsche Postbank that it doesn't already own.

So in practice, most banks will probably take the view that they will need to get to the 7 per cent core tier one ratio more-or-less immediately, to reassure their creditors and investors.

Comments

  • Comment number 1.

    Basel III and potential bonus shrinkage:
    Most details of Basel III were agreed in July, leaving Sunday's meeting to adjust or add a few final pieces.
    In the wake of the global financial crisis, which was largely due to risky trading practices by investment banks, leaders of the Group of 20 called on regulators and central banks too work on visible but tougher bank capital rules.
    The G20 leaders will endorse BASEL III RULES when they meet in Seoul in November. The new rules will be effective from 2013 but in phases.
    Regulators and bankers have agreed that banks will need to have a minimum core "Tier 1" capital ratio of somewhere between 7 & 9% but of what?
    Of their RISK-BEARING assets, including something called a "capital conservation buffer."
    Tier 1 refers to a bank's basic capital reserve, which is used to absorb unexpected financial shocks; the core level had been pegged at 2% - sadly much too little to withstand the recent financial crisis.
    Any bank that fails to keep the agreed upon buffer (capitlization) would have to CURB PAYOUTS SUCH AS BONUSES AND DIVIDENDS.
    Most debate has been over how long banks will have to comply with the tougher regulations; the final package is expected to have a transition period of about five to 10 years, depdning how things go.
    There are anxieties: Banks in some countries face a long road to recovery; the Basel III requirement will cut the amount of money that this marginal banks can lend.
    Meanwhile, Deutsche Bank, Germany's biggest bank, has stated that it will likely raise 9 billion euros ($11.4 billion) to strengthen its position.
    Regulators remark they know that the new Basel capital regulations will increase the stability of the financial system without hurting lending, assuming that the financial institution is starting from a reasonably capitlized position, and why would anyone borrow from a bank that wasn't in a reasonably capitalized position?

  • Comment number 2.

    > Will new Basel rules lead to bonus shrinkage?

    Only for bankers, so let's all rejoice.

    > it may mean that banks progressively increase what they
    > charge for credit and increase the provision of credit
    > at a slower rate.

    We have to cut the economy anyway, to emit less carbon.
    Double celebrations are called for. If we force banks to
    keep (say) 25% core tier one capital, could we prevent
    the end of the world? How about 50%?

    Where should the set-point be?

  • Comment number 3.

    "Central bankers, politicians and borrowers may well point out to banks that an alternative way of financing the cost of servicing increased capital requirements would be to slash the remuneration and bonuses of bankers."

    This issue will just not go away. I can understand that the governors' group meeting could not make any decisions about remuneration and bonuses, but the politicians of the G20 who have to ratify this can agee to pass laws in their countries which will make bankers think like the rest of us and not like our civil servants.

    This is the way it should work. The present lot of world leaders are all going to have a certain amount of domestic unpopularity as cuts dig deeper and the realisation hits their electorates what cuts really mean. They will need to do something to boost their popularity. What better way than have a go at the bankers? If, I mean IF, the G20 leaders could deal with the bankers in a unfified way there would be little prospect of the banks moving to other countries for that reason.

    Please have a go at bankers. I need something to make me smile. Those who talk about bankers being essential to our GDP are obsessed with numbers. I want jobs and a country dependent on Financial Services is not one that will provide jobs. The best way to cut the cost of benefit is to have more jobs. The lack of jobs is the elephant in the room.

  • Comment number 4.

    Is it just me or does 7% really sounds ridiculous?
    And it was 2% !?
    Anything under 10% sounds more like 0 (ZERO) to me. (And I'm not saying that 10% would be enough.)
    How does this sounds? "Give us your money, we will take care of it and in case something goes wrong, you may have 7% of it back".

    Excuse me but 7% increase from 2% doesn't convince me at all that the banks will not abuse the taxpayer again soon.

    And they may go on as before until 2018!
    MAD!

  • Comment number 5.

    Turkeys will not vote for Christmas - ever....

    The absurdly protected banking and financial services industry makes gigantic monopoly profits - that is the problem. Let everyone loan ten times their capital and see how many banks stay in business!

    Bonuses are irrelevant - what matters is the total pay package - so the only thing that will work is a National Maximum Wage (and probably a similar limit to wealth.) Otherwise they will just fiddle the system.

  • Comment number 6.

    "Central bankers, politicians and borrowers may well point out to banks that an alternative way of financing the cost of servicing increased capital requirements would be to slash the remuneration and bonuses of bankers."

    If that was going to happen, then why hasn't it happend yet? It's been three years. Bonuses will not be cut down to size until the spivs have every penny on the planet all to themselves and we're all serfs.



  • Comment number 7.

    "Failure is the ultimate regulator, unfortunately the people who fund a lot of the election campaigns in many countries mysteriously became 'too big to fail'."

    Or another point as put in an article by Paul Cella "The New Atlantis -
    The Financial Crisis and the Scientific Mindset"

    The Error Concerning Man

    Wall Street trusted probabilistic abstraction in lieu of that older method of investment, which operates, as Professor Bhidé puts it, according to “subjective judgments in the holistic manner of a common-law judge,” who considers “all the relevant precedents and features of the case at hand,” and anticipates “the possibility of mistake and ignorance.” A newfangled machine of “blind diversification,” facilitated by the faith in technical mastery, replaced the ancient sanity of humility before the unfamiliar.

    Humility where has it gone?

  • Comment number 8.

    Governments should behave much more like farmers...

    Bankers squeal like crazy when it is suggested that they might pay the same tax rate as the maid who cleans their house or the cleaner who wipes the marble floor of their toilets.

    Bankers squeal that we retire too early as they buy their retirement homes at 40 in Monaco and the south of France.

    Bankers squeal that we need to make hundreds of thousands redundant because we can't afford public services while hiding their assets in the Cayman Islands.

    Bankers squeal like crazy that we have too many immigrants when the City has thousands of non-doms paying no tax on their assets.

    Bankers squeal that they need to pay crazy salaries to attract talent but what the public sees is the Oxbridge-reject son of a former Prime Minister in his twenties being paid by an American investment bank a bonus greater than the annual salary of a top paediatric surgeon.

    Bankers squeal that they need to pay crazy salaries to attract talented and 'exceptional' people - but the public sees that there are tens of thousands of these 'exceptional' people in the City.

    Bankers squeal that their salaries and fees are justified when the FTSE and pension funds have stagnated for a decade and savings rates do not keep pace with inflation.

    Bankers squeal that the free market should determine their remuneration when the public has spent billions sustaining a banking system that would have collapsed without government support.

    Bankers squeal that they may have to move their banks from London despite the UK printing billions to save the banking system.

    Bankers squeal that they are supporting the public good despite Standard Variable Rates on mortgages moving over 5% when the base rate is 0.5%.

    The greediest and most materialistic woman I knew at University, and have encountered since either professionally or personally, has worked for Goldman Sachs, HSBC and Morgan Stanley. She had to leave banking, as she couldn't stand the greed. The City is a global greedy pig magnet.

    Bankers squeal just like pigs on the way to the slaughterhouse. Farmers wisely ignore the squeals, knowing that they do what they have to. Governments have a great deal to learn from farmers.

  • Comment number 9.

    5. At 7:22pm on 12 Sep 2010, John_from_Hendon

    I agree. The disgusting amounts of wealth in so few hands is destroying democracy.

    The more I'm learning the more afraid I'm becoming.

  • Comment number 10.

    3. At 6:52pm on 12 Sep 2010, Boilerbill wrote:
    IF, the G20 leaders could deal with the bankers in a unified way there would be little prospect of the banks moving to other countries for that reason.

    One is reminded of a quote from Churchill
    "You can always count on Americans to do the right thing — after they've tried everything else."

  • Comment number 11.

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

    Caroline Baum in Bloomberg Businessweek looks at some of the speculation about the conference's agenda:

    "One website said the agenda this year would include approaches to provoking the kind of economic breakdown that could 'justify the establishment of a full-scale world economic governance.' Another website said the group would discuss manufacturing a global depression to implement their dream of one-world government.

    "That these assertions sound less wacky than they used to tells you to what extent public and private sectors have become enmeshed and to what degree governments have coordinated their national and regional bailouts."
    ===============================

    Oh wait, that is a different thing isn't it?

  • Comment number 12.

    And a reminder ...
    Break them up.

    Plus, to norwici: a nice riposte to *spiv dogma* at #8. Well put.

  • Comment number 13.

    Central bankers, politicians and borrowers may well point out to banks that an alternative way of financing the cost of servicing increased capital requirements would be to slash the remuneration and bonuses of bankers.
    .........................................................................

    I'm sure they will 'point it out', however I can't see that making any difference.

    Now except for the few in receipt, it appears there is fairly universal condemnation and no shortage of disgust at these lottery win salaries and multiples of salary being paid in bonuses, and it really has to stop.

    Unfortunately for the vast majority of folk, these people don't pay any attention to what governments, borrowers or central bankers say. They will simply carry on in the same old way, creaming massive salaries and bonuses for themself to the cost of everyone else.

    Only unified regulation of salaries in this sector, by all governments can change things, and I really can't see that happening.

    So where will this lead? Only one place as far as I can see, more pain for us. I can only agree with what's already been posted, the more I look at this, the more worried I become.

  • Comment number 14.

    8. At 7:31pm on 12 Sep 2010, norwici wrote:

    > Governments should behave much more like farmers...
    > Bankers squeal just like pigs on the way to the
    > slaughterhouse. Farmers wisely ignore the squeals,
    > knowing that they do what they have to. Governments have
    > a great deal to learn from farmers.

    At least you can make sausages out of pigs. Bankers, on the other hand, are completely useless.

  • Comment number 15.

    Will new B AAAsel rules lead to bonus shrinkage?

    The hole of the too pig to fail political/financial system is in need a shrink


  • Comment number 16.

    It seems that the concept of Central Banking as being the only one that is available is a sad symptom of mono cultural deficit, and of course is symptomatic of a controlled mindset.

  • Comment number 17.

    1. At 6:40pm on 12 Sep 2010, BluesBerry wrote:

    why would anyone borrow from a bank that wasn't in a reasonably capitalized position?

    ==========================================================================
    Why not? I obviously wouldn't lend them money, but as a borrower I would sort of hope that they might collapse, and that my loan might get forgotten about in the subsequent confusion!

  • Comment number 18.

    Already answered your own question

    https://www.bbc.co.uk/news/uk-11279763

  • Comment number 19.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 20.

    Why not go back to the 8% cash and 28% liquid asset ratios of long ago, so that ageing economics texts and teachers can have a new lease of life and prove again that what goes around comes around?

 

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