Snap analysis by the experts: Implementation is key to Basel III success

The global "Basel III" deal on bank capital standards was reached at lightning speed by the usually slow moving regulators - substantive negotiations took about a year, compared to a decade for the current Basel II rules.

But implementing the new standards consistently over the lengthy phase-in period will be a headache for national regulators, and determine whether Basel III succeeds better than its predecessor in reducing bank sector risk.

• The Basel III rules are much tougher than Basel II, which failed to ensure banks held enough capital to withstand the worst financial crisis since the Great Depression.
• Although Basel III more than triples the amount of top-quality capital that banks will have to hold in reserve, there are several potential pitfalls in timing and content that could undermine the reform's effectiveness.
• The key aspects of the completed package will not all be phased in until the start of 2019, presenting a challenge for supervisors and their political masters to maintain momentum in their supervision of the sector. Lobbying by banks or an eventual return to boom times could blunt the will to enforce Basel III, as memories of the global credit crisis fade.
• The new capital conservation buffer of 2.5 percent, which is lower than some banks had feared, will not be fully in place until the start of 2019. At this time, the buffer plus the Tier 1 capital requirement will total 7 percent; in practice this is likely to become a solid floor for banks, because they will not want to face curbs on payouts such as bonuses, dividends and share buybacks. Falling below 7 percent could damage a bank's reputation among investors and in the money markets.
• The new capital rules are not the only fresh burden on banks; they should be seen in conjunction with a range of regulatory initiatives that together could have large and unpredictable effects on banks.

Banks will have to comply with the first new global liquidity standard from January 2015; this will increase pressure to build up reserves of cash-like assets.

Separately, regulators will introduce far tougher capital requirements on bank trading books from the end of 2011, and these will force some institutions to rethink whether they want to continue financial market trading.

Also, national regulators may still impose other surcharges on big, systemically important banks as they grapple with the "too big to fail" problem; this prospect could cause large banks to build up more capital than the Basel III rules, taken in isolation, appear to imply.

But there are doubts about how effective the new countercyclical buffer will be, if and when it kicks in.

"You have a bald number to protect against excess credit but bubbles tend to affect individual asset classes at different points in time so it's a blunt instrument. To manage risk you have to be more targeted," said Richard Barfield, director at PriceWaterhouseCoopers.

It will be up to each national supervisor to determine when banks on its turf should start building up a countercyclical buffer; in the past, this has been a recipe for widely different approaches by regulators.

• Implementation is likely to be more universal than it was under Basel II; this time the United States appears fully on board, after it failed to implement all of Basel II. However, the lengthy transition period means political and economic changes may have altered the intentions of U.S. regulators by the time compliance becomes mandatory.
• Some top banks already hold more high-quality capital than Basel III will require. But many banks may feel pressure to show investors they can comply with the new package sooner rather than later, in order to ensure they are not be lumped in with the stragglers in raising capital.

"I expect that what will happen is that the larger banks will move toward these figures ahead of the timetable," said Barfield at PricewaterhouseCoopers.

There are still controversial loose ends for regulators to tie up to make the Basel III package fully effective.

The announcement of full details of a planned cap on leverage and new liquidity requirements were delayed in July this year; their implementation is not due until 2018 once full details have been fleshed out, which will not be easy.

The consensus on Basel III could start to fall apart if unforeseen impacts or foot-dragging by some countries starts to give banks in certain places competitive advantages over peers elsewhere.

"There has been a tremendous focus on getting this done quickly and it has been done to the G20 timeframe, which is why we need this ongoing monitoring and ability for mid-course corrections," said Simon Hills, a director at the British Bankers' Association.

Basel III is at the core of the G20's efforts to apply lessons from the global financial crisis, and Sunday's agreement will allow G20 leaders meeting in Seoul in November to congratulate themselves by endorsing a major reform of banks.

But there is a risk that the G20 could put too much reliance on higher bank capital levels and not focus enough on strengthening other aspects of the financial system that were found wanting in the crisis.

"Apart from a consistent worldwide application, it's important that capital is just part of the process of improving financial stability. The other key factors are improved supervision, improved risk management and making those things happen as well is the difficult challenge," Barfield said.

For full details on what has been agreed by the Basle Committee please CLICK HERE to go to our “BASEL III” page.

Basle III – Almost ready to roll?

From current reports it looks like the details of the Basel III package could finalized early next week – by the 15th September in fact.

It is believed that that banks will have to hold Tier 1 capital of 9 percent (currently in Basel II this is pitched at 4%), including a 3% "conservation buffer".

At least 5 percent of Tier 1 will be pure equity or retained earnings. If Tier 1 capital is less than 9%, banks will not be allowed to pay out dividends to shareholders.

In good times, banks have to allocate another 3%, the "anti-cyclical buffer". It simply means that in good times banks need Tier 1 capital of 12% in order to be able to pay dividends.

If one adds 4% Tier 2 capital, we reach an interesting number: 16% (6 percent Tier 1, plus 4 percent Tier 2, plus 3 percent conservation buffer, plus 3 percent anti-cyclical buffer).

Hedge funds are already shorting certain banks while investors try to understand how much capital banks may need to raise in order to be able to pay dividends.

The next step? Possibly the G20 summit in November, where the group’s leadersthey will give their seal of approval.

Remittances – New money transfer service for Nepalese immigrant workers in the UK

UK based international remittance company Mobile Union has joined forces with Nepalese financial services provider Laxmi Bank and Nepal-based retail remittance operator United Remit, a business unit of the Chaudhary Group, to launch remittance service “mtxpress” in the UK.

With the new service, non-resident Nepalese people can deliver money home without having to visit a retail location. After completing the online registration process, consumers can send money to the desired recipient via a debit card. The recipient will be notified through an SMS that their cash is available for collection at any of Lamix Bank's or United Remits locations across Nepal. Customers who own an account at Laxmi bank can choose to directly credit that account, in which case the funds are available to draw down the next banking morning.

“mtxpress” is a service that offers peer-to-peer remittances via the internet. “mtxpress” will be rolled out globally during 2010, focusing on the South East Asia and African corridors.

EU agrees financial supervision overhaul

EU regulators have reached a landmark accord that will change the way financial supervision takes place in the bloc.

Starting in 2011, new supervisory authorities will oversee the banking, insurance and securities industries, with regulators granted the power to investigate financial products and activities and temporarily ban them if necessary.

The new systemic risk watchdog will also be created to issue government warnings on potential economic risks. It will be headed by the president of the European Central Bank, who is currently Jean-Claude Trichet.

Meanwhile, credit ratings agencies will come under scrutiny from the European Securities and Markets Authority.

Michel Barnier, financial services commissioner for the EU, said: "We have reached a crucial milestone.

"We will have the control tower and the radar screens needed to identify risks."

In July, Mr Trichet called for the rest of the international community to follow Europe's lead in embarking on deficit reduction programs that cut public spending and raise taxes.

SEC charges investment adviser with $11m fraud

Sandra Venetis, an investment adviser from New Jersey, has been accused of leading a Ponzi scheme which saw $11 million stolen from clients.

According to the Securities and Exchange Commission (SEC), the accused misled investors through fake promissory notes issued via three associated firms. She is also alleged to have promised investors that their capital would be used to fund loans to doctors.

Instead, the money was given to relatives of Ms Venetis as well as being used to pay off a range of debts gained from travelling and gambling.

Bruce Karpati, co-chief of the SEC's Asset Management Unit, said: “Venetis abused her position of trust to target older investors who were the most vulnerable to her egregious lies and misrepresentations.

“The SEC's enforcement action and the settlement reached ensure that she will never work in the securities industry again."

Ms Venetis agreed to settle by way of a court order from the SEC which will freeze her assets as well as ensuring fines are imposed at a later date.

The order also means the accused is banned from future interactions with brokers, dealers or investment advisers.

Payment systems and the role of the Eurosystem

The European Central Bank (ECB) has just published a new book entitled “The payment system – payments, securities and derivatives, and the role of the Eurosystem”. The book provides a comprehensive insight into the handling of financial transactions and the functioning of the related financial market infrastructure – a core component of the financial system. It also explains the role and policies of the Eurosystem – which comprises the ECB and the 16 national central banks of the euro area – in this field.

The book is in three parts.

1. Providing an insight into the market infrastructure of modern economies with a view to examining key concepts which have general validity and are thus applicable around the world. Emphasis is placed on the principles governing the functioning of the relevant systems and processes and the presentation of the underlying economic, business, legal, institutional, organizational and policy issues. 
2. Focusing on issues concerning the market infrastructure for the handling of euro-denominated payments, securities and derivatives, as well as the most important EU legislation. 
3. Explaining the operational, oversight and catalyst roles of the Eurosystem and the policies established by the Governing Council of the ECB in this field. It also considers the legal basis for the Eurosystem’s involvement and describes the transparent and cooperative approach adopted by the Eurosystem with a view to pursuing its public policy objectives while acting within a modern market economy environment.

The book can be downloaded free in PDF fromat from the ECB’s website – CLICK HERE.

New Namibian bank for mobiles only

The central Bank of Namibia has authorized the establishment of a new mobile-only bank to be operated by local m-payments operation MobiCash.

The new “MobiCash” bank will target the rural unbanked population. Users of the service will have to open an account and deposit a cash balance at a network of local agents and stores. The cash account is registered on the user's phone and can be used to make person-to-person, utility and merchant payments.

In granting the license, the Bank of Namibia says the extensive costs of establishing branch networks obstructs the penetration and reach of conventional banks into remote areas.

"In view of these challenges, the Bank of Namibia regards this initiative as a truly innovative solution towards promoting financial inclusion to cover the unbanked and under banked population in Namibia," says the bank in a statement.