Felix Salmon reassesses the Basel III process on international bank standards, and actually finds reason for optimism:
I very much hope that Die Zeit is right about the Basel III capital requirements: the numbers being mooted there are definitely at the top end of what anybody expected.
They start with a bare minimum Tier 1 capital requirement of 6%; that’s a substantial increase of 50% over the 4% minimum that holds right now. And then they get tougher. There’s also a 3% conservation buffer: essentially, if your Tier 1 capital is less than 9%, you’re constrained in what you can do; certainly you can’t pay out dividends to shareholders. On top of that, the countercyclical capital buffer is being set at another 3%, which means that in good times, healthy banks wanting to pay dividends will need Tier 1 capital of 12%.
Ah, you say, but can’t they just be clever with definitions, including all manner of dodgy-looking assets as part of their Tier 1 capital? Well, yes. So there’s a parallel set of requirements for what they’re calling Core Tier 1: essentially, pure equity. That has a minimum of 5%, plus a conservation buffer of 2.5%, plus a countercyclical capital buffer of another 2.5%.
And there are Tier 2 requirements too. Many of us grew up with the simple rule that Tier 1 capital had to be 4% and Tier 1 plus Tier 2 had to be 8%; the new proposal is a bit more complicated, but you can still add 4% onto whatever Tier 1 number you’re looking at to look at the new requirement for Tier 1 plus Tier 2.
As a result, a healthy bank wanting to pay dividends in a growing economy will need total capital, including Tier 2, of 16%. That’s a reassuringly large number.
I’ve never been on the “all we need to do is raise capital requirements” side of the debate. Indeed, during the Lehman bankruptcy, we learned that at the time they collapsed, they were in fact seen as well-capitalized. So let’s not go overboard patting ourselves on the back. What’s more, the Basel Accords have not been finalized. It seems that there’s a split between European regulators, who want less capital, and American ones, who prefer more. And to be sure, the banking lobby will get right in the middle of those final conversations.
But as an opening bid, this is well beyond expectations. Most expected a 15:1 ratio: if you look at the final number Felix provides, that’s done to more like 6:1. And these requirements would get adopted almost immediately in the US, as part of the Dodd-Frank law.
I think where you’ll see the banks first attack this is on the time-frame needed to get to these numbers. They’ll ask for a very long period, perhaps with waivers for “systemically important” firms or some such nonsense. Certainly banks will need a ramp-up period, but it should be seriously limited.
