Banking: Basel III rules raise capital requirements again

An meeting over the weekend in Basel in Switzerland resulted in a new set of capital adequacy rules that will be imposed on banks all over the world. The agreement will more than double the amount of top-quality capital banks must hold in an effort to make the sector more resilient to volatile asset prices and credit risk.

Once the rules are implemented, banks will be required to hold Core Tier One capital (equity plus retained earnings) equivalent to 4.5% of risk-bearing assets. Existing rules set the ratio at 2%. In addition, banks will have to hold common equity to the value of 2% of assets as a "capital conservation buffer". Together with the Core Tier One requirement, banks will thus have 7% of their total assets on hand in top-quality assets. The rules will be implemented slowly. The Core Tier One requirement will take effect in January 2015, and the capital conservation buffer gradually from the following year.

The decisions act on recommendations from the G20 in 2009 for rules to strengthen banks' balance sheets, so as to avoid the necessity of recapitalising them with taxpayers' money in the event of another crisis. The next G-20 meeting takes place in Seoul in November, at which heads of state will discuss the rules.

While the rules will certainly strengthen the global banking sector against risk, the other side of the coin is that they will lower the amount of money that banks will be able to lend to businesses, slowing credit growth, production and consumption at a time when most governments are concerned with jump-starting their economies. In Africa, there are sure to be objections to the effect that African banks did not need bailouts (apart from Nigeria's, for different reasons), and so should not be forced to limit their lending and earnings.

The Swiss meeting was attended by central bank governors and government authorities from 27 countries, and chaired by Jean-Claude Trichet, President of the European Central Bank.

F.C

Source: www.lesafriques.com