Basel III Rules: Banks Given Until 2019 To Fully Comply With New Global Regulations
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BASEL, Switzerland — Bankers and analysts said new global rules could mean less money available to lend to businesses and consumers, but praised a decision to leave plenty of time – until 2019 – before the financial stability requirements come into full force.
The so-called Basel III rules, which will gradually require banks to hold greater capital buffers to absorb potential losses, are likely to affect the credit industry by imposing stricter discipline on credit cards, mortgages and other loans.
Requiring banks to keep more capital on hand will limit the amount of money they can lend, but it will make them better able to withstand the blow if many of those loans go sour.
European Central Bank Chairman Jean-Claude Trichet said leading central bankers who reached the deal Sunday in Basel were convinced that the new measures were a "fundamental strengthening of global capital standards" which would make a substantial contribution to economic stability and growth.
Trichet declined to estimate how much money banks would need to raise to meet the new requirements, but analysts expect the figure to run into the hundreds of billions dollars (euros).
He also said he had "full confidence" that the measures would be implemented by U.S. authorities, despite their not fully having adopted the last round of Basel rules.
European savings banks warned that the new capital requirements could affect their lending by unfairly penalizing small, part-publicly owned institutions.
"We see the danger that German banks' ability to give credit could be significantly curtailed," said Karl-Heinz Boos, head of the Association of German Public Sector Banks.
Insisting that French banks were "among those with the greatest capacity to adapt to the new rules," the country's banking federation nevertheless said they were "a strong constraint that will inevitably weigh on the financing of the economy, especially the volume and cost of credit."
Juan Jose Toribio, former executive director at the IMF and now dean of IESE Business School in Madrid, said the rules could hamper the fragile recovery.
"These are regulations and burdens on bank results that only make sense in times of monetary and credit expansion," he said.
Larger banks were quick to praise the agreement and insisted they would meet the required reserves in time.
Deutsche Bank's Chief Executive, Josef Ackermann, said he thought the Basel III package was a good one.
"I think the decisions that were taken are the right decisions, they go in the right direction, and I also believe the fact that they gave the banking industry so much time for implementation clearly reduces the effects on the real economy, which is also very positive," he said.
Down the line consumers could see banks tighten their rules on loans and possibly impose higher banking charges as financial institutions spend the next few years building reserves to meet the new regulatory requirements.
The largest U.S. banks are already in compliance with the higher capital standards demanded by Basel III, meaning their customers won't be directly affected, according to Richard Bove, banking analyst at investment firm Rochdale Securities. That would mean that Basel itself won't have a direct impact on credit and lending broadly for U.S. consumers served by the largest banks.
Small businesses that rely on borrowing from community banks may be more affected, said Sean Egan, managing director of Egan Jones Rating Agency. "They will try to make up for the higher capital requirements by lending at higher rates and stiffer terms."
Analysts said that in those countries where national regulators were quick to clamp down on risky lending practices following the credit crunch, the new rules may actually release some pent up capital the banks had been holding back in anticipation of far tighter regulation than was eventually agreed.
"The lower-than-feared minimum capital requirement and longer implementation time frame could potentially lead to banks being more open to give loans to companies and private people, which again could improve the economic situation worldwide," said Teresa Nielsen, an analyst at private bank Vontobel in Zurich.
Under the new rules, the mandatory reserve known as Tier 1 capital would rise from 4 percent to 4.5 percent by 2013 and reach 6 percent in 2019.
In addition, banks would be required to keep an emergency reserve, or "conservation buffer," of 2.5 percent.
In total, the amount of rock-solid reserves each bank is expected to have will be 8.5 percent of its balance sheet – but not until the end of the decade.
Some major banks, particularly Switzerland's two biggest UBS and Credit Suisse, will likely face additional requirements because of the threat their collapse would pose to the national economy, Nielsen said.
Relief at the generous time frame and lower-than-expected minimum reserves lifted banking stocks across the board Monday.
"Banks in Europe that have been weighed down by problems get a little more time to adjust to the rules," Nordea bank chief economist Annika Winsth said Monday. "It is positive that they are given an opportunity to handle this."
The rules still must be presented to leaders of the Group of 20 rich and developing countries at a meeting in November and ratified by national governments, who have pledged to overhaul banking rules as part of a wider set of global financial reforms.
U.S. officials including Federal Reserve chairman Ben Bernanke issued a joint statement Sunday calling the new standards a "significant step forward in reducing the incidence and severity of future financial crises."
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Jordans contributed from Geneva. Associated Press writers Pallavi Gogoi in New York, Martin Crutsinger in Washington, Geir Moulson in Berlin and Daniel Wools in Madrid also contributed to this report.
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GREG KELLER AND FRANK JORDANS 09/13/10 02:12 PM ET Associated Press