Banking looks to the future under Basel III
This month may be seen as a momentous occasion in the minds of many people working within the UK's, and indeed the world's, financial services industry, as the new Basel III banking regulations have been unveiled.
The Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, made the announcement at their September 12th meeting, confirming they would endorse the agreements they reached in July.
A key regulation introduced under the Basel III framework is the requirement for banks to hold top-quality capital amounting to seven per cent of risk-bearing assets - a significant increase on the previous two per cent.
It is hoped that storing this percentage as capital will help to reduce the threat of a future financial crash of similar severity to the global economic downturn witnessed in recent years, with the Lehman Brothers investment bank one of the major casualties of the crisis.
While this will see banks having to increase their capital significantly, the news that in many cases this will not have to be achieved until 2019 has been welcomed by the sector. By 2015, financial services providers will be required to boost their core tier-one capital ratio to 4.5 per cent. By 2019, banks will have to hold a further capital conservation buffer of 2.5 per cent.
However, an online poll of readers of the Guardian website revealed that 12.2 per cent of respondents believe Basel III has the power to adequately prevent a banking crisis in the future, but the remainder believe it will be unsuccessful in this ambition.
Nout Wellink, chairman of the Basel Committee on Banking Supervision and president of the Netherlands Bank, said that a future banking crisis cannot be completely ruled out, but he believed the measures would make it "less likely". Adair Turner, chairman of Britain's Financial Services Authority, spoke in favour of Basel III, saying: "I think it's a very, very balanced package which is designed to achieve future resilience without in any way restricting the ability of the banking system to support the real economy."
Business secretary Vince Cable also appears to be supporting the regulation, saying that UK banks should count themselves in a good position in terms of capital. Speaking in an effort to dissuade banks from opting to restrict their lending in reaction to the Basel III capital requirements, particularly in light of the 2019 deadline, Mr Cable suggested that any move by UK banks to not lend to UK businesses, using the regulations as justification, would not be tolerated by the coalition government.
Perhaps the most measurable reaction to the new framework has been that witnessed on the stock market since the publication of the guidelines. European indexes rallied following the news, with the FTSE 100 Index rising 1.2 per cent to 5,565.53 on the day after the announcement.
Looking to the future of banking under the new Basel III regulations, Jean-Claude Trichet, president of the European Central Bank and chairman of the Group of Governors and Heads of Supervision, said the agreements that have been reached offer a "fundamental strengthening" of the standards of global capital. He concluded: "Their contribution to long term financial stability and growth will be substantial."
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