Banks phony accounting is coming to an end. Basel III accords require banks to raise new capital and to stop accounting losses and "unrealized profits" as capital.
They will require new capital when nobody is fool enough to invest in banks again. Well except for the gov't.
Basel III won't actually make banks go broke again. It will just expose how broke they already were.
The draft Basel III regulations include:
* "tighter definitions of Common Equity; banks must hold 4.5% by January 2015, then a further 2.5%, totalling 7%.
* the introduction of a leverage ratio,
* a framework for counter-cyclical capital buffers,
* measures to limit counterparty credit risk,
* and short and medium-term quantitative liquidity ratios."
First, the quality, consistency, and transparency of the capital base will be raised.
* Tier 1 capital: the predominant form of Tier 1 capital must be common shares and retained earnings
* Tier 2 capital instruments will be harmonised
* Tier 3 capital will be eliminated.
December 31, 2012 Tentative Target for implementation of Basel III
Maybe there will be a (financial) doomsday on 2012?
The banks battle back
A behind-the-scenes brawl over new capital and liquidity rules
May 27th 2010 | From The Economist print edition
THE world is now knee-deep in proposals to reform finance. From industry lobbies to global regulators, everyone is brimming with ideas. On May 26th the European Commission became the latest to propose a new bank levy, joining the IMF and governments in Europe and America. On the same day Americaâs Financial Accounting Standards Board unveiled proposals requiring banks to report the fair value of loans on their books.
As the proposals pile up, so does the estimated cost to the banks. In America analysts at Barclays Capital calculate that the hit from domestic legislation alone could amount to 16% of banksâ profits in 2013. Analysts at Credit Suisse reckon European banksâ profits in 2012 could fall by 37% because of proposed regulation.
That would be a shock almost as bad as the crisis itself, which is why in the real world policymakers will have to prioritise. The most important bit of reform is the international set of rules known as âBasel 3â, which will govern the capital and liquidity buffers banks carry. It is here that the most vicious and least public skirmish between banks and their regulators is taking place.
The Basel club of bank supervisors put out proposals in December, which aim to boost capital and get banks to wean themselves off short-term funding. In the submissions they have made in response, banks have been critical. Although they claim to accept the objective of raising safety buffers, banks argue that any big changes will impede economic growth. Many also say that the Basel clubâs timetable, which is to have the proposals finalised by this year and implemented by late 2012, is unrealistic.
Some complaints will be brushed aside. During the crisis there was a total loss of confidence in banksâ capital standards, with most investors resorting to more basic accounting information to measure solvency. It is for this reason that Basel 3 is likely, however much the banks squeal, to take a firm line on excluding low-quality instruments such as preference shares from core capital. Likewise, few can seriously object to its demand that banks hold enough liquid assets to withstand a severe, month-long liquidity shock.
The tricky bits will be setting the absolute level of capital that is needed in the system and defining a tolerable amount of short-term funding. The Basel club has not articulated a vision of how big the buffers should be. But its instincts are pragmaticâStefan Walter, the secretary-general of the Basel Committee, says the aim is âa balanced package where the costs will be phased to avoid economic disruption and the benefits will be substantial.â
That hasnât stopped the banks fighting their corner. Their main lobbying body, the Institute of International Finance, will release a report on June 10th that can be relied on to paint an apocalyptic picture of the economic cost of Basel 3. Later this year the Basel club will publish its own assessment, which should be less alarming.
On capital there is room for compromise. The happy secret of Western banking is that the system in aggregate now has lots of capital (see chart) relative to the net losses experienced over the crisis. The kind of erosion of capital forecast by the Federal Reserveâs stress tests last year, for example, has simply not materialised. That means the Basel club can legitimately argue that banks in aggregate do not need to raise much new capital. It can focus instead on fixing loopholes and finding ways to close outlier banks that lose far more money than the average.
Where Basel 3 will almost certainly have to retreat is in its proposal to force banks significantly to cut their structural reliance on short-term funding. Credit Suisse reckons the regulatorsâ proposed ânet stable funding ratioâ would require European banks to raise â¬1.3 trillion ($1.6 trillion) of long-term funding. Even over the course of several years, finding enough deposits or issuing enough bonds to meet that requirement is a hair-raising prospectânot least because of regulatorsâ parallel efforts to remove the implicit guarantee that bank creditors still enjoy.
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