Basel III battle heating up
The contest over the final shape of the Basel III rules is now a behind-closed-doors battle between Germany, other European nations, Japan and the United States, reports this week suggest.Australia's banks are hoping that the final rules will avoid unnecessary regulatory complexity and cost, and that Australian regulators and their few allies in the talks can win some crucial concessions.The rules put forward by the Basel Committee on Banking Supervision are designed to lower the risk of another global financial crisis. They do so largely by requiring banks to hold more capital for a given volume of lending.Details of the negotiations over the final shape of the rules are scarce; the participants have been asked to keep them secret. The absence of information on the evolution of the proposed rules has heightened local anxieties amongst Australian banks. Australian banks are currently seen as some of the least risky in the world, as demonstrated by the major banks' AA credit ratings. They do particularly well on measures of core equity, originally a cornerstone of the Basel III proposals. In addition, prudential regulator APRA is widely seen as having tough standards.But as negotiations intensify amongst the big players, the Australian industry could be affected by several new arrangements designed to deal with overseas banks' special circumstances. Many of the Basel Committee's proposals are designed to address problems that emerged over the past three years in 20 to 30 troubled institutions in the US, Europe and Japan.For instance, a proposed "leverage ratio" is reportedly designed largely to guard against a repeat of Swiss giant UBS's near-fatal mid-2000s overgearing. A leverage ratio - a ratio of gross loans and investments to capital - would have blocked some of the specific borrowings which got UBS into trouble. It is one of five key elements of the Basel III reforms.But depending how it is designed, a leverage ratio could cause problems for some Australian banks. Australia and a few other nations, such as Singapore and Saudi Arabia, have also faced a problem with proposed minimum liquidity standards. These standards would require banks to hold substantial government debt. That's a problem for a few smaller countries like Australia, Hong Kong and Saudi Arabia, where government debt is low. In July, the Basel Committee published amended proposals acknowledging the need for special standards to deal with this problem.Reports this week suggest the negotiations are heating up ahead of a scheduled mid-September meeting.The Wall Street Journal - the media outlet with the most obvious inside knowledge of the talks - reported yesterday that "the leaders of the US, France, Germany and Japan have become involved" in the Basel talks.The Journal also suggested that Basel Committee officials had suggested that banks be required to hold a minimum five per cent of assets as "Tier 1" capital; other sources have suggested the figure could be six per cent. On top of that, banks will effectively be required to hold a two or 2.5 per cent "conservation buffer" of additional capital. Occasionally,