The new solvency rules will be very expensive for banks

Sunday, September 12, regulators and central bankers have finalized the agreement called “Basel III”, applicable to 2019 and supposed to strengthen the capital level of banks

There could be no more symbolic date. Two years, almost to the day, after the collapse of the US investment bank Lehman Brothers on September 15, 2008 – the triggering event of the global financial crisis – central bankers and regulators around the world have reached an agreement, Sunday, September 12, in Basel, Switzerland, to strengthen the capital level of banks.

This reform will be extremely costly for the banking sector, which, with very few exceptions – some Swedish banks – will have to buy the missing capital on the financial markets.

This is a lot of money, especially in a tense post-crisis period, in France, according to a very first estimate of the profession, around 70 billion euros!

This tightening of regulations was demanded by the G20, anxious to strengthen the soundness of the banking system so that in case of new economic shock states are no longer forced to inject public funds.

Banks’ capital allows them to absorb losses on bad credit or bad investments. The higher its capital – its equity – is, the more resilient an institution is.

Following this simple principle, the Basel Committee has developed technically complicated rules. These converge towards one objective: to raise the bank solvency ratio from 2% currently to 7%, by 2019, ie in eight years. This ratio relates the capital of an institution to its commitments in the economy (credits, etc.). It limits risk-taking.

In detail, this ratio should be broken down into two parts: 4.5% of so-called “hard” equity, considered as “real” capital, because composed of shares and profits set aside each year; and 2.5% equity equivalent, designed as a cushion.

This ratio of 7% must be respected constantly. If banks fail to do so, regulators could limit dividends paid to shareholders and executive compensation.


In addition, to complete the security of the system, Basel “sages” opt for a second safety cushion. It should comprise between 0.5% and up to 2.5% of additional own funds, at the discretion of each national regulator. This second cushion will have to be set up in a period of growth, to prevent economic overheating and excessive credit distribution. Thus, the ratio of 7% will be increased by this second mattress.

In preparation for many months, this reform of a ratio unchanged since 2004 was feared, bankers.

Admittedly, at 7%, the future ratio is in the low range of possibilities explored by regulators – from 6% to 10%. They took into account the fragility of a sector still recovering from the worst crisis since 1929 and which holds a large part of European public debts.

But the reform will require a big effort from all banks, European, American or Asian. In Germany, where Deutsche Bank has already announced, Sunday, September 12, the largest capital increase in its history, to nearly 10 billion euros.

Also in France, where, however, banks are in the middle-high in terms of quality capital, with more than 4% of “real capital”.

Both countries fought for flexibility on the part of the Basel Committee. They were only partially heard. And, already, the banking lobby warns against the “inevitable” harmful effects that the new regulation will entail.

On the one hand, say the institutions, we must expect tensions on the distribution of credits or payday loan consolidation. “It’s mechanical: for 100 credits, where we were asked 2 of equity in law, and 4 in practice, we will be asked 7, says a banker. In the coming years, our results will be used to improve our ratios, not to take credit! ”

In addition, banks are worried about their profitability, which will also decrease mechanically. This is measured by reporting the profits of institutions to equity. But “the bank yields had already fallen with the crisis. Our fear, continues this source, is to see investors on the stock market arbitrate in favor of other more profitable sectors of the economy.

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