Banks win time but not respite from Basel

Written by Reuters | London | Updated: Jul 29 2010, 09:10am hrs
Banks will get more time and leeway to introduce new global capital rules but calls to lend more freely may be harder to resist as a result and the new regime will still be far tougher than anything that exists now.

Central banks governors and heads of supervision published changes to the draft Basel III accord late on Monday, sparking rises in European banking shares and a collective sigh of relief.

The less draconian treatment of deferred tax assets and affiliates for calculating capital, a long phase in for new liquidity rules and a cap on debt will ease pressure on banks to raise vast amounts of funds or sell off minority stakes.

The way in which a capital charge is slapped on a bank's exposures to other banks' credit risks will also be calculated more leniently, taking pressure off capital requirements.

There are some wins for us here the more sensible treatment of minority interests and deferred tax assets, and recognition they have to do more work on the liquidity side of things, said Simon Hills, a director of the British Bankers' Association.

It introduces an element of certainty. One of the concerns we have had is while this was up in the air, we were unable to plan the shape of our balance sheet, Hills said.

Credit Suisse said coupled with last week's credible stress test of European banks, the Basel changes should fuel a continuation of the sector's bounce by removing uncertainties.

Investors won't know the full impact of Basel III until later in the year when the Basel Committee completes the picture with a figure for a higher tier-1 capital ratio and details of how long banks have to ditch lower quality capital from their capital calculations.

Here the regulators will have to heed a deal cut by the Group of 20 leading countries last month to have a longer phase in than the original end of 2012 deadline for Basel III.

There will be a gradual migration so industry can get there through retained earnings and reasonable capital raising, Basel Committee secretary general Stefan Walter said.

Experts said fears the more lenient approach may compromise the main goalto prevent a new financial crisis following the credit crunch that started in 2007were probably overdone.

Most of the Basel III elements are new at the global levelsuch as a tighter definition of top quality capital, liquidity rules and a cap on debtand will therefore still be a big tightening on the present situation despite this week's tweaks to the committee's original plan.

There is some relief for the sector on timing but regulatory pressure remains significant, said Execution Noble analysts.

And there will certainly be more pressure for banks to lend.

David Clark, chairman of the Wholesale Markets Brokers Association, said banks would have fewer excuses not to help businesses. There is going to be a political consequence of all this. The banks will now be under a lot more moral pressure to lend, he said.