Debating Basel around the world: this is not a done deal

EU lawmakers will resume talks on Basel III today amidst a chorus of dissent on how the new capital rules might impact banks and the European economy. Already the launch of some reporting has been delayed to January 2014, a year later than was initially hoped for, and there have been multiple calls to ease the definitions of High Quality Liquid Assets for capital ratio calculations. In light of European divisions and the new Bank of England working paper, we thought it interesting to see what other players around the world were thinking about Basel.

Mexico in the lead: Mexico to adopt Basel III rules this month, according to Reuters.

India on track with some pain: banks will need to raise an additional $90 billion in capital and likely more later, says the governor of the Central Bank. According to the Wall Street Journal, “While banks have enough time to plan the time-table of capital raising, there are challenges over capitalizing state-run banks as government finances remain stretched.”

Columbia off track: Fitch: “New regulations will maintain the minimum regulatory
capital at 9% of risk weighted assets and create a new measure, the ratio of
“base” capital to risk weighted assets at a minimum of 4.5%. Tier 1 capital is
better defined and includes the highest quality capital a bank can have.
However, we expect only marginal capital improvement, because the new rules,
which will go into effect in August 2013, fail to tighten the criteria for Tier
2 capital and deduction of intangible assets.”

Germany’s government in favor while German banks are against: Bloomberg: ““Basel III talks are being dragged out in Brussels,” Schaeuble said. Cabinet signed off on the bill to send a “signal” to institutions including the EU parliament and the European Commission “to share the urgency.” German lenders criticized the appeal, while a senior government official said the proposed creation of an EU-wide supervisor is adding urgency to the Basel III schedule.” Germany is talking about moving forward with a national version of Basel III even as the EU is split.

Citigroup’s Vikram Pandit: Basel III forces Citi to reorg but overall, more details will push business to unregulated vehicles. This gets back to Haldane and Madouros’s paper from SFM yesterday that the best Basel rules are simple (“Thou Shalt Not…”). According to Fox Business citing Pandit, “Another concern, Mr. Pandit said, is the continued flow of capital and business from regulated banks to unregulated financial institutions. “What is likely to happen–and we’ve seen it before–is that costs and restrictions” imposed on banks will push business “into unregulated or less-regulated financial entities,” thereby increasing risk, he added.”

US Fed extends Basel comment period: Originally the deadline was Sept 7, but the Fed accepted the arguments of a group of state banking regulators asked for an extension, according to Reuters. The new deadline is October 22. Having read the proposed text of US capital rules, we can agree that the extension on the comment period was justified. The American Bankers Association is already against Basel III, but US rulemakers clearly don’t care much.

South Korean banks see minor fall in BIS Tier 1 ratios, but nothing too serious yet: Bloomberg: “Banks’ non-performing loan ratio for households rose to almost a six-year high in the second quarter as South Korea’s slowing economy weighed on property values. Regulators are urging local lenders to maintain their buffers as uncertainty around Europe’s crisis persists and banks prepare to adopt stricter Basel III rules next year.”

South African banks’ shortfall: AllAfrica: “In a study by consultants Bain & Co it was calculated that the net stable funding ratio (NSFR) as required by Basel 3 would cost the five big banks – Absa, First National Bank (FNB) in the FirstRand stable, Nedbank, Standard Bank and Investec – a cumulative R471-billion in new capital.”

Given the serious issues that confront implementation and the rising voices asking for change we think it is too early to call Basel a done deal on a global basis.

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