Banks Running Scared as Basel Group Increases Reserves Ratio
TO THE outsider, Basel is what passes for Switzerland's cultural centre: it is the site of the country's oldest university, and it is a tri-national city - with suburbs in France and Germany - which forms Switzerland's largest metropolitan area.
To bankers, however, it's the equivalent of Transylvania. It is the place that raises the hairs on the backs of their necks because it is in Basel that their supervisors meet and suck their lifeblood from them: the banks' ability to generate money by lending to others is curtailed by the international rules set out there.
Every pound that the Basel Committee of Supervisors says has to be held in reserve as "core tier one" or "tier one" capital is a pound that cannot be lent to homebuyers or small businesses, or anyone else.
And that Committee will tomorrow tell banks they have to hold back a lot more of this. It will also likely put restrictions on what assets can be counted as tier one capital.
At the moment, banks have to hold tier one capital of 4 per cent of their assets, after liabilities have been subtracted, of which 2 per cent has to be "core tier one". The new rules are likely to require them to hold nearly double this: the speculation is 7 per cent made up of 5 per cent at all times plus a 2 per cent "buffer" during the good times. The final rules won't be known until tomorrow, but some banks aren't hanging around until then. Shares in Germany's Deutsche Bank plunged yesterday as it lined up a share issue of up to 9bn (7.4bn) for next week.
The cash raised will partly help to increase its stake in Postbank. But as European banks go, Deutsche is relatively weakly capitalised, so part of the cash will go towards making sure it can comply with the new standards. And Deutsche won't be the last. Analysts expect many similar cash calls over the next few months as other banks in Germany, Spain, Portugal and Greece follow suit. While they will be given time to get their houses in order, those that can will move quickly, if only to be to reassure skittish investors.
British banks are watching developments in relative comfort because the Financial Services Authority already requires that they hold twice the existing European minimum, and UK standards are still likely to be tougher than the Basel standards even after Sunday's announcement.
The most lightly capitalised bank is Lloyds (with tier one of 9 per cent) and this is still much more than what almost any bank held pre-crisis. The tier one ratio of just above 13 per cent that Barclays has (by this …
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Publication information: Article title: Banks Running Scared as Basel Group Increases Reserves Ratio. Contributors: Not available. Newspaper title: The Independent (London, England). Publication date: September 11, 2010. Page number: 46. © 2009 The Independent - London. Provided by ProQuest LLC. All Rights Reserved.