Regulatory officials from more than two dozen countries are trying to exercise more flexibility in taking care of world’s biggest banks with its new set of capital standards, known as Basel III, Reuters reported on Wednesday. In 2010, global regulators had decided to adopt tougher measures for a fixed number of critical institutions to prevent the recurrence of a global financial crisis and restore public confidence.
The flexibility will allow regulators to add or remove banks, which are conventionally very important, from the list of risky banks.
What’s the Aim?
Basically, the concerned regulators are trying to adopt a practical approach to make matters more smooth and measures more effective. Some banks from the Basel list may attain capital levels that are above the risk meter, but there might be others that fail to do so.
Consequently, regulators may decide to include or exclude banks under its stricter capital standard. The latest revision aims at creating a foolproof program that will save the economy from going bust ever again.
The Basel Committee is working with the Financial Stability Board to bring flexibility into the list of world’s major banks.
Target Banks
The final number of banks to be included in the initial phase of the program has not been decided upon. But major banks such as The Goldman Sachs Group Inc. (GS) and HSBC Holdings plc (HBC) will be among the ones to feature before smaller risky institutions.
Capital Surcharge
Apart from initiating flexibility, regulatory officials are mulling over imposing a capital surcharge on the world’s largest banks whose collapse could pose major threats to the global economy, Bloomberg reported last month.
The convention will adopt tougher measures for banks deemed “too big to fail,” in desperate attempts to stave off another global financial crisis and restore public confidence.
The Extent of Surcharge
Mega banks worldwide may be forced to maintain an additional three percentage point reserve compared to other financial institutions under the new restriction. The extra capital surcharge may range from 1% to 3% of a bank’s common equity, Bloomberg said.
The Swiss government took prompt action, proposing a 10% increase the minimum common equity requirement from the Basel III mandate of 7% for UBS AG (UBS) and Credit Suisse Group (CS).
Basel = Safety
Whatever the form of capital standard and whoever the target, the primary intention of regulators is to check risky activities taken by banks and build a capital armor around the recession-stricken world.
As most of the major banks seem to comfortably maintain the minimum capital norms mandated by the Basel Committee, they will never hesitate to take extravagant risks.
Also, the success of regulatory efforts in restoring worldwide financial stability has created a wrong impression that the government will save big institutions from failing whenever they are in major financial trouble. As a result, an additional capital restriction and flexibility are required to prevent risky indulgences.
Needless to say, Basel standards would act as building blocks in the present weak economy, with restrictions ultimately translating to fewer bank collapses and less involvement of taxpayers’ money for bailing out troubled financial institutions.
CREDIT SUISSE (CS): Free Stock Analysis Report
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