The Basel Committee on Bank Supervision recently released the new Basel III requirements. That’s right. Basel II worked so well that banks had enough capital on hand to withstand the recent financial crisis without significant bailout (cough, cough), so why not continue on with that idea? Just increase requirements, give banks a bunch of time and call it Basel III. Excellent idea. Now I realize that I am no banking expert, nor do I know all the ins and outs of why Basel II failed, but we’ve covered this topic enough at our annual operational risk management conferences to know that a number of points relating to Basel III just aren’t adding up. For instance – and please feel free to help me out:
1. I understand that banks have to triple their amount of capital on reserves, but do they really need nine years to do it? Yes, it will take time to increase their current reserves by 2.5% (7% in total of their risk-bearing assets) but a lot can happen in nine years. Times change, people change, needs change. Don’t your personal monetary requirements change more frequently than every nine years? I know mine do. This just seems like procrastination to me.
2. Is this really a global solution? The US did not fully adopt Basel II, so why will we implement Basel III? There have been articles published in leading trade magazines alluding to the fact that the US is “fully on board,” but why now? Why this time? And, who’s watching anyway? What are the penalties, if any, in place if US banks are not Basel III compliant by 2019?
3. What about the little guy? As a small business owner, I can’t help but wonder what pressure the Tier 2 and Tier 3 banks are feeling right now. Yes, they have nine years to figure it all out, but when a lot of the big boys (or girls), come out and say, “Yeah, this plan looks great, and by tPiggy Bankhe way, we are so big, we already comply,” having nine years doesn’t really matter all that much anymore. The smaller banks feel pressure to comply now in order to show they can keep up and stay in competition with the Tier 1 banks. Sure, 2.5% doesn’t seem all that large, but some banks could be required to raise hundreds of billions of euros. Has anyone establishing these new requirements offered a game plan or suggestions for how banks can increase their capital reserves without further stalling economic recovery?
4. What makes Basel III better than Basel II? Who came up with the winning calculation for the amount of capital banks need on reserve? How has it been tested?
I fully agree that some capital reserve requirement needs to be put in place to eliminate the mentality “I’m too big to fail” because that clearly didn’t work for us in the past, but are the new Basel III requirements the answer? Will this really all be solved in nine years or is this a life sentence? Will there be a Basel IV, V, and VI before we even see 2019? If you have any insight to these questions, please feel free to share. I would love to know someone else’s thoughts on this topic.