Archive for September, 2010|Monthly archive page

Is Basel III a Threat to Global Recovery?

In Economics, Financials, Politics on September 14, 2010 at 20:18

The question to ask here is, do we want a recovery similar to the previous ones in nature so as to end up here once again and start blaming the ‘system’? A rational answer would be NO, but I will get back to that in a bit.

Last Sunday bank regulators and the most important central bankers, met in Basel to decide on the new capital requirements rules to be imposed on banks. Much talk had been done prior to the meeting around the impact those new rules would have on the course of the global economy.

The key point of the Basel III accord is the increase of the tier 1 (core capital) rates from 2% to 4.5%, and the addition of a 2.5% on top of that rate as a conservative buffer for periods of high stress.

Markets responded pleasantly to the new standards given most of the big banks’ positions already fell within those boundaries.  One should remember, however, that credit growth has yet to expand as banks are still insecure about lending to one another. As soon as lending pipes turn on again, banks will then feel the force and restriction of those standards.

Global recovery shouldn’t be affected by the new rules. Yes, lending is essential for a growing economy, but excess lending is to be avoided. Some analysts argue lending and deposit rates will go up in the short-run as banks will now have less funds available to invest and greater need to attract new ones. Truth is, it doesn’t always work that way.. You see, higher capital can help at restoring confidence within the markets. At this point, bad psychology is keeping rates higher. The new rules have the power to reverse this climate and encourage lending in the intra-bank market.

This fresh global recovery oughts to be built upon sustainable credit growth. The Basel rules work two-ways; first, they force banks to limit their risky activity of their business and secondly, it provides them with a compulsory ‘safety net’ in case they get into trouble during the next crisis.

Regulators said those rules are phased in until 2019 which makes the intermediate period very crucial in terms of how will banks behave and whether or not we’re going to have another major crisis until then.