Monday, April 12, 2010

Basel talks on bank capital

The one thing that is certain about international bank regulation is that capital requirements for banks will go up. The uncertainties are two: how much and over what time? We should have some idea by the end of this week when the Basel committee on banking superivsion meets representatives of banks to discuss possibilities.

One key item is the core capital requirement, currently pegged at 8%. In the wake of the financial crisis, one proposal was that tier I (which is half of core capital) should itself be 8%. This looks unlikely now given the resistance from banks.

Another item relates to liquidity. On this item, FT reports:

The liquidity proposals come in two parts: one, known as the Bear Stearns rule, requires banks to have enough liquid assets on hand to survive a 30-day crisis, while the other, nicknamed the Northern Rock rule, requires banks to have stable long-term funding, favouring deposits and heavily disfavouring wholesale sources. It is the latter rule that has attracted most criticism.
Good banks today operate with capital of 12-13%. We should expect this to rise to 15-16%. By what date? The earlier deadline for introduction of higher capital norms was end 2012. This may be pushed back or the introduction of new norms may be calibrated over time.