THE REGULATIONS EXPLAINED
Q.WHAT IS BASEL III AND WHAT ARE ITS ROOTS?
A.In the wake of the financial crisis, the G20 decided international capital and liquidity requirements for the banking sector were in need of a major overhaul. The original rules, known as Basel I, were drawn up in 1988 by a committee formed following the disastrous collapse of German bank Herstatt in the 1970s. The measures were revised in Basel II in 2004 although the US did not implement the update.
Q.WHEN IS IT DUE TO COME INTO EFFECT?
A.World leaders have asked the Basel board to finalise the third version in time for the G20 meeting in Seoul in November. The intention is to enforce it around the world by the end of 2012, although more complicated measures will be subject to transition periods, observation periods and phase-ins.
Q.WHAT ARE BASEL III’S MAIN POINTS?
A.Basel III plans to make banks raise their tier one and tier two capital ratios. Banks will also need “counter-cyclical” capital levels, meaning they will have to hold more in good times to slow their activity and less in bad times to encourage lending. Softer forms of capital that cannot absorb financial shocks will be eliminated. Basel III will introduce a leverage ratio to limit banks’ borrowings and a “net stable funding ratio” to force institutions to match the duration of their liabilities and assets more closely.
Q.WHAT CHANGED IN YESTERDAY’S TWEAKS?
A.The announcement was the result of extensive horse trading. Most importantly, the net stable funding ratio has been delayed for eight years while regulators develop a workable version. The leverage ratio was also put into testing until 2018, although banks will have to disclose their individual leverage figures from 2015.
Q.ARE THE RULES SOFTER THAN IN DECEMBER?
A.Certain conditions have been eased since the Basel?Committee published a draft at the end of last year. Other than the more gradual timetable for bringing in the leverage and liquidity ratios, banks will be able to count government and high-quality corporate bonds toward the stock of liquid assets they have to hold against a future crisis. They will also be able to include capital held through minority-owned offshoots as part of their tier one capital.
Q.HAS THERE BEEN BEHIND-THE-SCENES LOBBYING?
A.Banks and industry groups have been pressuring the Basel Committee to water down capital requirements and push back the schedule for bringing in tougher rules. France, Germany and Japan have also been pressing against countries such as the UK and US for softer measures.
Q.WHAT ECONOMIC IMPACT WILL BASEL III HAVE?
A.This is a key battleground for lobbyists, who claim Basel III will make it harder for banks to lend and thus slow economic growth around the world. According to the Institute of International Finance, Basel III will shave three per cent from the GDP growth of the US and Europe over five years. The French banking association is more extreme, estimating a six per cent hit. In contrast, Doug Elliott at the non-profit Brookings Institute in Washington thinks the impact will be negligible, a bit like a minor change in base interest rates.