The oversight body of the Basel Committee on Banking Supervision is planning proactive actions to ensure that the world’s largest banks are strengthening their capital and liquidity positions to confront another financial meltdown, according to a Bloomberg report. The committee is set to carry out on-site assessments of the financial conditions of these banks.
The Basel Committee chairman, Stefan Ingves said that the committee will publicly reveal the details of the at-risk banks. The committee will also scrutinize national authorities to make sure that they are on track to implement the rules set by the committee.
In 2010, the regulatory officials of more than two dozen countries proposed a set of minimum capital standards for banks, known as Basel III. The intention was to adopt tougher measures, to prevent the recurrence of a global financial crisis and restore public confidence.
The committee mandated banks to hold more than triple their core capital to make them solvent. Since then, many of the banks have been selling their non-core assets to fortify their fund base.
Moreover, in June, the oversight body proposed a few new rules that would force the world’s biggest banks to hold extra capital on their balance sheets as protection and prevention against global financial crisis. The targeted banks are those that could threaten the global economy if they collapse.
As most of the major large-cap banks seem to comfortably maintain the minimum capital norms mandated by the Basel Committee, they might not hesitate to take further extravagant risks in order to grow further. As a result, it was required to force these banks to stock up additional capital reserves so that they can confront financial turmoil, if they create any.
Under the new rules, mega banks the world over would have to maintain an extra 1% to 2.5% of capital on their balance sheets in addition to the Basel III mandate of 7%. The percentage will vary depending on the size of their balance sheets. Based on a particular bank’s importance and position in the overall financial system, the regulators will set a method to identify target banks.
The Basel Committee will allow the target banks three years — 2016 to 2018 — to meet the new capital requirements.
The Swiss government was an early bird, proposing to increase the minimum common equity requirement to 10% for UBS AG (UBS) and Credit Suisse Group (CS).
In Conclusion
A weak capital level is always a threat to worldwide economic well being. Needless to say, meeting Basel III standards would act as building blocks of the still unstable world economy, with fewer bank collapses and less involvement of taxpayers’ money for bailing out troubled financial institutions.
Governments have promised to implement national rules for the banks by the start of 2013 to comply the Basel accord. However, the planned scrutiny at the doorsteps of banks reflects that the oversight body is concerned about the progress of the governments and banks.
It’s true that the Basel requirement would slow down the big banks. Then again, a slow but steady growth is always better than dashing into yet another financial catastrophe.
