A Good Explanation of What the Basil III Accord Really Means

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Bankers poised for Basel III accord
By Brooke Masters and Patrick Jenkins in London

Published: September 9 2010 19:35 | Last updated: September 9 2010 19:35

Banking supervisors and central bankers from 27 countries will gather in Basel, Switzerland, this weekend to adopt what is set to be the most important regulatory reform package since the financial crisis, even as German, US and other officials continue to jockey over some provisions.

The officials overseeing the Basel Committee on Banking Supervision, the global rule-making body, are expected to set minimum requirements for the amount of top quality capital banks must hold against future losses and announce a timetable for reaching the standards. The figures are set to determine the shape, stability and profitability of global banking for years to come.

EDITOR’S CHOICE
Editorial Comment: Basel should stand firm - Sep-09.Shake-up set to raise costs of borrowing - Sep-09.Fears for German banks under new rules - Sep-09.Interactive: Global financial reform - Aug-27.Money Supply: And the next crisis ...? - Feb-25.German banks try to fend off Basel III - Sep-06..Ben Bernanke, chairman of the US Federal Reserve, Mervyn King, governor of the Bank of England, and Jean-Claude Trichet, president of the European Central Bank, are among those meeting on Sunday to thrash out the final details of the banking reform package known as Basel III.

A large group of countries has coalesced round a plan to require banks to hold core tier one capital – essentially equity and retained profits – equal to 5 per cent of their risk-weighted assets, compared with the current requirement of 2 per cent. In a new measure, banks would also have to hold a buffer of additional capital equal to 2-3 per cent of assets, meaning banks that fall below a core tier one ratio of at least 7-8 per cent or face restrictions on their ability to pay dividends and bonuses.

However, some countries have so far refused to sign up and are still pushing for totals as low as 4 per cent or as high as 10 per cent, including the buffer, people familiar with the talks said. Germany has been particularly vocal in its concerns about setting the ratio too high. “It’s not finished,” said one regulator.

The exact numbers could also shift as part of the negotiations over the timetable. US officials would like the minimums in place in 2012 with the buffers a few years later, while a German central banker said this week he expected the minimums and buffers to phase in over five to 10 years starting in 2013. Some participants believe a longer timetable may be the price of tougher numbers.

Analysts believe the outcome may also turn on the issue of so-called contingent convertible capital, nicknamed “cocos”. These instruments, essentially bonds that only convert into equity under a stressed scenario, do not count towards the core tier one minimum, but the French have been arguing that they should be usable to meet the buffer capital requirements. This apparently technical issue could radically change the effect of the regime. If the buffer can be funded with cheaper cocos, the result would be far less severe.

One person close to the process said the Basel group was unlikely to allow exceptions for smaller banks, as some in Germany had hoped. The group will insist the “entire world” be subjected to “a totally level playing field with absolutely no exceptions”, the person said.

Sunday’s meeting may well have to defer decisions on the size of two other planned parts of the package: surcharges for extra-large banks and a second buffer designed to counter the economic cycle.

The influence of the committee’s decisions could be profound. If it sets requirements too low, another banking crisis could result; too high and the world economy could struggle with a lack of credit.

James Gorman, Morgan Stanley’s chief executive, said the Basel reforms were “the single most important reforms that will be made coming out of this financial crisis”.

Additional reporting by James Wilson in Frankfurt
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