Two weeks ago, Banking Supervisors and Governors of National Banks from 27 countries put together the so-called Basel III package. This package includes a bundle of measures aimed at the stricter regulation of banks to ensure long-term financial market stability. In future, higher capital and liquidity requirements shall also prevent financial institutes from shifting losses to the state and thereby to the taxpayer. According to experts, this time the USA will also be on board.

At the centre of the package is the rise of the core capital ratio by banks from 4 to 6 %. The hard core capital contained therein shall be raised from currently 2 to 4.5 %. This includes, according to Basel III, in respect of stock corporations the nominal capital and retained earnings. Both can be fully used to cover losses. Hence, compared to Basel II, the definition of hard core capital is stricter. Jaime Caruana, Director General of the Bank for International Settlements (BIS), is therefore talking about an increase both in quantity and quality of the capital requirements for banks. Apart from that, banks are obliged to build up a capital conservation buffer of 2.5 % hard core capital to be able to maintain the core capital ratio of 6 % also in times of crisis. It is also planned to impose sanctions if institutes have failed to build up this buffer and to introduce supervisory measures to rebuild this buffer after it has been tapped into during difficult times. Other measures include a buffer designed to counter the economic cycle as well as for the first time internationally uniform ratios of debt and the liquidity of banks.

Success of the banking lobby

From the point of view of the AK, in particular the increase in capital requirements, the stricter definition as well as the capital conservation buffer have to be welcomed. This, however, is spoiled by the fact that the regulations do not cover the so-called shadow banking system, including the hedge funds, which played a considerable part in bringing about the crisis.

The very long transition period - banks have to fully meet the requirements only from the end of 2018 - is putting off the target to achieve financial market stability for far too long. As the recent crisis has shown, this would be of particular importance for employees. They have to foot the major part of the bill in form of turbulences in the labour market and impending budget consolidations, not least as a consequence of the sharp rise in national debt caused by the generous rescue packages made available to the banks. 

The extremely long time periods have to be regarded as a success for the banking lobby, which already months prior to the agreement on Basel III painted apocalyptic threat scenarios. The International Institute of Finance IIF talked of a capital requirement of about 270 billion Euros, which the banks in the Eurozone alone had to cover by 2015. There was also talk about the planned regulations stifling the recovery and costing 10 million jobs. Shortly before final details were being announced, the Federal Association of German Banks warned against a capital requirement of 100 billion Euros for the ten major domestic business banks - only to retract this prognosis a short time later.

Alternatives to the credit crunch

The increased capital requirement, so the argumentation, would lead to a credit shortage and eventually put economic performance at risk. Because the required 6 % core capital ratio refers to the amount of the risk weighted assets of a bank. These include the loans granted and the securities bought, whose possible failure represents the risk. The smaller the risk of these assets, the easier it is to achieve the new 6 % ratio. The threat scenarios mentioned are now based on the assumption that banks could get rid of high-risk credits and might apply stricter criteria when granting new loans - resulting in a credit crunch. Unbiased reports, however, work on the assumption that the majority of banks will be able to cover the increased capital requirement by retaining profits. Apart from that, it is not necessarily the credit portfolio, which must be adapted to the risk; securities too can be sold off and replaced by low-risk ones.

Demands of the AK

With regard to the debt and liquidity ratios mentioned above, one must levy criticism on the fact that it is not yet clear what they will look like. The more time passes after the crisis, the less stringent they might become.

Liquidity ratios provide information on to which extent a financial institute is able to liquidize assets in order to fulfil any called for immediate repayments. Thus, in particular during the crisis, deposits have proven to be secure liabilities. The AK therefore demands that assets secured by deposits, will be underweighted with regard to their risk assessment and that this will be included in the calculation of the liquidity coverage ratio, the liquidity ratio on short-term mature liabilities. The net stable funding ratio informs on the quality of long-term obligations and should be structured in such a way that the ratio between long-term investments of a bank and their short-term refinancing is sustainable.

What also leaves much to be desired in the Basel III package is the treatment of system-relevant banks in the event of future crises. Even though a capital surcharge in addition to the 6 % has been considered for "too big to fail" banks, it has not yet been sufficiently formulated. Apart from that, the AK demands a special insolvency law for banks. To make sure that states can no longer be blackmailed in future, it shall be made easier to break up these banks and to involve their owners in repaying the losses.