If all goes well, the world will be a slightly safer place after top central bankers and bank regulators emerge today from meetings in Basel, Switzerland.
By agreeing on new rules aimed at preventing financial crises, they will remove a source of uncertainty that has weighed on markets just as concerns about European sovereign debt rise again.
However, the rules will also put further pressure on weaker banks, many of which will have to raise more capital. This may represent another step in the triage of the banking world into healthy institutions and sick ones with few options other than to plead for more government aid or go out of business.
PHOTO: REUTERS
The financial authorities from 27 countries, including Federal Reserve Chairman Ben Bernanke and European Central Bank President Jean-Claude Trichet, have been working for months on what new constraints the banking industry should face.
The debate about the Basel III rules has added an extra dose of tension to markets made nervous in recent weeks by the problems of the Anglo Irish Bank in Ireland and new questions about sovereign debt holdings.
“The system does not have the capacity for another round of bailouts, nor does the public have the tolerance for it,” said Nout Wellink, chairman of the Basel Committee on Banking Supervision, which created the proposed rules.
However, the new regulations probably mean that banking will become a less profitable business.
According to some predictions, economic growth could even suffer as banks curtail lending to build up bigger financial cushions.
“If the new rules come, all banks will go to the capital markets looking for new money, but you would need a crystal ball to know if the markets will provide it,” said Carsten Gross, who follows regulatory issues for the Association of German Public Sector Banks, which has said its members might need to raise 50 billion euros (US$63.5 billion) and warned that economic growth could suffer as a result.
Wellink’s panel is overseen by the Group of Central Bank Governors and Heads of Supervision, under the chairmanship of Trichet of the European Central Bank.
Trichet’s group is expected to forge a pact on the new rules late today, though talks could continue through tomorrow. Its recommendations will go to the G20 nations in November, and take effect only after individual nations write them into law.
Many analysts say the new rules could be positive for most banks.
“So far regulators have been quite prudent in trying not to burden the banking sector too much,” said Marie Diron, an economist in London who advises consulting firm Ernst & Young.
She said that regulators were expected to phase in the new rules through 2018, giving banks plenty of time to adjust.
The central issue before the regulators in Basel is how much capital low-risk capital banks should be required to keep in reserve and what qualifies as low-risk capital.
Under current rules, banks might hold so-called core Tier 1 capital, the most bulletproof category of reserves, equal to as little as 2 percent of their assets. Analysts at Morgan Stanley expect the regulators to raise the required amount to about 8 percent.
In addition, during boom times regulators could oblige banks to raise their reserves an additional 3 percent, to a total of about 11 percent, as protection against a sudden market collapse. According to other estimates, banks might even be required to set aside as much as 16 percent in boom times.
Much hinges on what banks will be allowed to count as core Tier 1 capital. Indications are that regulators will only allow equity — common shares in the institution — and earnings that banks retain rather than paying out to shareholders.
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