LAST week marked the second anniversary of the collapse of Lehman Brothers. It was also the week the Basel Committee on Banking Supervision chose to release their Basel III recommendations that will shape the future regulation of the global industry for years to come.
This is no coincidence; Basel III is designed to prevent a situation like the collapse of Lehman Brothers – and the crisis which followed, when trust not only in banks but between banks failed – from ever happening again. In this sense there is no doubt Basel III and a global agreement on bank capital requirements is a positive step.
Banks have been provided with the certainty they need in order to plan future strategy. And unlike the previous recommendations, Basel III has dealt with the issues of capital and liquidity swiftly, decisively and with a sense of urgency. We are still at an early stage in the process and must ensure the intentions underpinning the recommendations hold true as the legislative process takes its course.
This is politically sensitive: legislating to increase the amount of capital banks are required to hold will reduce systemic risk in the financial marketplace but it will also result in credit being harder to come by and more expensive for the consumer.
Whilst many UK banks are well capitalised, they will inevitably be cautious as the new capital requirements kick in. At a time when the government is asking them to lend more money to boost the UK’s recovery, it will be interesting to see how these two conflicting priorities are resolved. However, the key outcome of Basel III is that risk – an essential component within the financial marketplace – is managed in such a way it poses less of a danger to the UK taxpayer.
There are concerns the proprietary trading and other “risky” activities will simply move away from banks and instead be taken over by hedge funds, private equity firms and other “unregulated” bodies. Even though there is some evidence that this is already happening, it is misleading to describe these sections of the industry as “unregulated”. It will be more misleading in the future, with EU directives on Additional Investment Fund Managers and OTC Derivatives already the subject of intense discussion. More importantly, these financial vehicles pose far less of a systemic risk to the global marketplace than banks do and will not be bailed out if they fail.
Stuart Fraser is the policy chairman at the City of London Corporation.