Among other changes, the agreement reached by the Basel Committee on Banking Supervision, as outlined here, would boost the minimum requirement for common equity held by banks from 2 to 4.5 percent by 2015. The Tier 1 capital requirement would jump from 4 to 6 percent over the same period.
Along with requiring banks to hold more capital, the Basel Committee also is taking a closer look at the makeup of their capital. To reduce the risk that banks might run short of cash in the event of widespread panic and a run on deposits, the Committee has developed what it’s calling a “net stable funding,” Carfang says. This is an attempt to judge the stability of different types of deposits. Retail deposits typically are considered fairly stable, since few consumers move their money in and out of banks to gain a few basis points of interest – it’s just not worth it, given the work involved. Corporate customers, on the other hand, will.
Others also fault the agreements, but from the opposite perspective. “I’m not impressed with its [the Basel agreement’s] rigor,” says Richard Herring, finance professor at Wharton, speaking in a recent edition of Knowledge @ Wharton. “It still doesn’t require as much equity capital as all of the major banks that required intervention had in the reporting period before they failed.”
The upshot? Corporate bank deposits likely will be less valuable to banks than they have been. As a result, banks may lower the interest rates they offer corporate customers, or require a higher minimum balance in order to get any rate at all, Carfang says. “The capital requirements will cause prices to rise.”
In addition, treasurers need to watch the regulations being proposed, Carfang says, and speak up when they don’t make sense or would prove onerous. To date, few treasurers have done that, at least concerning this matter. Without their input, regulators have little reason to rethink their proposals. ###
Time will tell just how well the higher capital levels and other requirements of the latest Basel agreements stave off future financial crises. In the meantime, treasurers have a few steps to take, Carfang says. They need to secure their access to capital so that they’re less dependent on any one financial institution, and strengthen cash management practices in order to maximize their use of existing funds.
There’s little question, the goings-on taking place in Basel, Switzerland, over the summer and last month, culminating in what’s often referred to as the Basel III Accord, will significantly impact financial institutions. What about corporate treasurers? To find out, I talked with Tony Carfang, partner and director with Chicago-based Treasury Strategies. His take: “The regulations that come down on banks will flow through to the banks’ customers.” Moreover, the impact likely won’t be positive, Carfang notes.
If these changes were likely to prevent the next financial crisis, many might say they’re worth, regardless of the impact to banks and their customers. However, Carfang and other industry experts question whether they’ll accomplish this.
In addition, a more complex regulatory framework – as is the case in moving to the new Basel agreement – inevitably raises the cost of compliance. That’s likely to spur further consolidation in the banking industry, Carfang predicts. As it does, companies may find themselves with less bargaining power, and fewer options if they decide to look for new banking partners.
So, when calculating its assets and liabilities, a bank may have to slash the value of certain assets, based on their riskiness, Carfang says. While the details still are being worked out, the calculation could look something like nbajerseys's Blog, he says: A corporate deposit account used in the net stable funding ratio may count for only half its actual value, due to the risk that the company behind it may yank the money in order to get a better rate. A consumer’s account, on the other hand, may get counted at about 85 percent of its actual value.
“This might go a long way to preventing the last crisis,” Carfang says. However, the rules recently promulgated by the Basel Committee are overly prescriptive, he says: “You want strong institutions, but financial institutions also need flexibility to react to market conditions.” Carfang’s solution: Instead of issuing rules telling banks how to value different assets, regulators should simply allow the owners – both creditors and shareholders – of banks that take excessive risks to lose money.
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