Basel III has been like the bogeyman for bankers around the world for the last few years. It was supposed to be sweeping reforms as to the amount of capital and liquid securities must hold on their balance sheet as collateral or protection against their more risky activities. By increasing this number you effectively decrease the amount of leverage the banks can use to turn a profit therefore potentially reducing their ability to make the out-sized returns that made banking so sexy for the last 15 years or so.
The banking lobby has come up trumps so far and got a stay of execution in that last night BASEL III came in and didn’t look nearly as frightening as first thought. Duration to full compliance has been extended by another four years and the rules governing and the regulators have broadened the terms of what they consider to be “liquid assets” that may be used as a buffer albeit at a discount to present value.
This is a big win I think for banks and can be construed as bullish in general as frees up banking system to engage in some risky activity i.e lending to SME’s perhaps as they do not need to hoard as much cash as they have been doing. This is admittedly a very rose tinted way of looking at it and remains to be seen. Hate to sound too cynical but more than likely all it represents is a win for bankers and frees them up to engage in some more risky activity for their own benefit.
It probably is a better idea to phase in these capital requirements rules as it would be the biggest cash call ever if banks around the world were forced out into the market looking for more capital at the moment and would put a severe hamper on future growth.
I remain hopeful the right thing is done here and we see not only an improvement in lending standards but also a risk appetite amongst borrowers and lenders.