New Basel Capital Accord Announced

Yesterday, the Bank for International Settlements announced that its Basel Committee on Bank Supervision has reached a preliminary agreement on a new capital accord widely known as Basel 3. Here is what the New York Times reported today.

Central bankers and regulators have reached an almost-unanimous preliminary agreement on new standards to reinforce the stability of the global financial system, adding to investor confidence in the outlook for many banks.

In the next few months, the regulators will conduct a detailed analysis of how the standards would affect the biggest banks in Europe, Asia and the United States. Under the plan, banks will have until as early as 2018 to comply with a requirement that they hold at least $3 in capital for every $100 they lend — a so-called leverage ratio of 3 percent. A leverage ratio is considered the broadest measure of a bank’s financial strength.

The regulators said the final amount might be adjusted. Whatever the amount, the requirement should have little effect on U.S. institutions, which already meet the 3 percent standard easily. Some European and Asian banks could have to reinforce their financial positions.

Like many movie sequels, this new capital accord is somewhat anticlimactic. An implementation period of seven years is the length of many business cycles and we will certainly see a need for adjustments to the capital accord by then. So, stay tuned for Basel 4.

Getting Ahead of the Risk Curve

In an acknowledgement that the problems that led to the financial crisis of 2008 have not been fully resolved, the Bank for International Settlements ("BIS") in Basel, Switzerland is seeking to address a return of excessive risk-taking in meetings this weekend with top financial leaders from around the world.  The Financial Times reported yesterday that the current low rate environment coupled with ample liquidity has set the stage for another potential crisis.  Here is what they had to say.

The Bank for International Settlements will gather top central bankers and financiers for a meeting in Basel this weekend amid rising concern about a resurgence of the “excessive risk-taking” that sparked the financial crisis.  In its invitation, the BIS cited concerns that “financial firms are returning to the aggressive behaviour that prevailed during the pre-crisis period”.  The meeting comes at a moment of intense uncertainty, with the global economy’s tentative recovery shadowed by “the overhang of private-sector debt and rapidly rising public debt”, and high unemployment.

It is a good sign that the BIS and others are looking to get ahead of the risk curve.  What remains to be seen is the reaction from the leadership of major financial institutions and the resulting behavior within the markets.

Bracing for Basel Changes

Dr. Nout Wellink, Chairman of the Basel Committee on Banking Supervision, delivered a speech earlier this week on the work planned by his committee to address reforms in the global banking system.  Based in Basel, Switzerland, the Basel Committee is part of the Bank for International Settlements which fosters international monetary and financial cooperation and serves as a bank for central banks across the globe.  Here is what Dr. Wellink had to say about the Committee's long-term initiatives: 

When it comes to the long term, we need to establish a clear target for the future regulatory system which substantially reduces both the probability and severity of a crisis like the one we currently are working though. By providing clarity about the future regulatory framework, we will help re-establish near term confidence, reduce the risk of competitive distortions and limit the degrees of uncertainty for the public and private sector. Also, by emphasising that these reforms will be phased in over an appropriate horizon, we reduce the risk that our own actions contribute to procyclicality in the system.

Let me now say a few words about the steps the Basel Committee has and will be undertaking to produce a more robust supervisory and regulatory framework for the banking sector. Such a framework needs to have four key components:

1. Strong regulatory capital,

2. Robust standards for bank liquidity,

3. Enhanced risk management, governance and supervision, and

4. Better transparency

Needless to say, major changes are needed and will be promulgated by organizations such as the Basel Committee.  Is your company ready to adjust to the coming changes?  Wheelhouse Advisors can help you prepare.  Visit www.WheelhouseAdvisors.com to learn more.