New Basel rules bring banks back to basic: analysts

26th September 2010, Comments 0 comments

New Basel III bank capital rules encourage a back-to-basics approach for banking and could therefore see those in major emerging countries benefit most from the reform, analysts said.

"The new rules will force banks to go back to simplicity, to the core business which would benefit banks that were respecting the core business in the first place," said Arturo Bris, professor at the business school IMD.

He underlined that banks in developing markets tend to adopt basic banking -- deposits and loans -- unlike western investment-oriented banks which have developed complex derivative products that were blamed for setting off the global financial crisis.

Regulators hardened their resolve for reforms to clamp down on risky trading after the world was sent to the brink of economic meltdown brought by the collapse of US investment bank Lehman Brothers.

Like many of its counterparts, Lehman Brothers had created ever-more complex financial instruments in its drive for profits, among them derivatives of 'subprime' home loans, which eventually led to its demise.

The failure of such once haughty Wall Street banks and some European counterparts contrasted sharply with emerging markets banks which were able to weather the crisis largely unscathed due to their conservative business model.

It also precipitated a sea change on the decision-making stage. For the first time, developing countries like India, China and Brazil were asked to participate in negotiations for new international banking regulations.

Regulators from 27 economies agreed on September 12 on the so-called Basel III reforms, which would require banks to raise their high quality Tier One capital from 2.0 percent to 4.5 percent of assets. An additional buffer was also imposed, bringing the total capital required to 7.0 percent by 2019.

The importance of emerging countries' participation was not lost on the eurozone's biggest bank Spain's Banco Santander's chairman Emilio Botin.

He described the new rules as "most significant" for the global financial system in decades, citing among reasons "the G20's commitment to adopt it in an agreed manner."

Jan-Egbert Sturm, who heads the KOF Swiss Economic Institute, said that the all-round participation in negotiations held the promise that implementation would be more even than that of Basel II, which US and Chinese banks largely shunned.

"I'm assuming that with Basel III, everything will be different -- that countries like China and India and many other developing economies and countries in the OECD will participate," he said.

The economist said that "the implicit assumption" of broad participation stems from the fact that "emerging nations took part in deciding these new rules."

"That's a big advantage compared to before. They all seem to be on the same playing field now, while before that, playing fields had different sizes.

"I hope that Basel III will lead to this one big playing field on the international level," he said.

He added that implementation by emerging market banks would come at little cost, given that their conservative style of banking and often stricter home regulations meant that many were already not far from complying with new rules.

However, Pascal de Lima, chief economist at Altran Financial Services, said that banks in developing economies outside of the rapidly-growing ones such as China, India and Brazil could find it harder to raise capital to meet the basic minimum, since they are seen to carry higher levels of risks.

Even fast-growing economies like China and India could be penalised by an additional "counter-cyclical buffer" of up to 2.5 percent, he noted.

The buffer is a further insurance measure which is to be introduced when there is excess credit growth resulting in risks building up system wide.

"For developing countries, they will be penalised in the sense that in case of very sharp growth, their central bank could decide to add on this additional 2.5 percent," noted de Lima.

Nout Wellink, the chairman of the Basel Committee on Banking Supervision, estimated that "hundreds of billions" of euros would be required for the implementation of new rules.

But while countries could yet decide finally to opt out of the rules, as they did of Basel II, they would be less likely to do so now as the "political situation is different," noted Sturm.

"We now have the financial crisis behind us. So the awareness of the problem is completely different from five years or 10 years ago," he pointed out.

"I hope that countries learnt that you can't do everything in isolation."

© 2010 AFP

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