Don't overlook the Basel II


Hot on the heels of Basel II comes the sequel - Basel III, due to be finalised by the end of 2011 and implemented by the end of 2012. Basel III is the work of the Basel Committee on Banking Supervision and proposes internationally agreed rules to improve both the quantity and quality of bank capital. It also discourages excessive leverage and risk taking by banking institutions, which will be a focus of discussions at the November 2010 Seoul Summit.

We have seen the huge impact that Basel II has made on the industry, causing the US crisis to go from credit crunch to cashflow starvation. Governments around the world could not just abandon an international monetary treaty that had been some twenty plus years in the making.
However, there is a school of thought that delaying the implementation of Basel II may well have eased the impending crisis, allowing regulation to be introduced in a more timely manner. Instead, it almost overwhelmed an already burdened international industry.
The implementation of Basel II, without a doubt, contributed to the liquidity crisis. Banks had to ensure that they complied with the new rules relating to risk profiling, liquidity, asset ratios, security etc. These were not just guidelines. The problem was that the advent of Basel II starved the commercial market of funds, as lenders retreated to rebuild their balance sheets and assets had to be reclassed in terms of risk and security.
If all of this sounds like a bad dream, what I am going to say next may make it seem even worse. Basel III brings more of the same and, although it is not yet on the statute, it seems that the guidelines set out by Basel III are currently being used by the Bank of England and the FSA to beef up new regulation being imposed on banks registered to do business in the UK.
The additional impact will be that, as we know, the FSA will be replaced by 2012. This is not a coincidence.
Basel III is based around rules on liquidity and risk. The Basel iiiCompliance Professionals Association (BiiiCPA) says:
“We are committed to move together in a transparent and coordinated way on national implementation of the agreed rules. Implementation of these new rules should be complemented by strong supervision."
This is not something that any of us can walk away from. It is coming, whether we like it or not.
“It is critical that our banking regulators develop capital and liquidity rules of sufficient rigor to allow our financial firms to withstand future downturns in the global financial system,” says BiiiCPA.
So the new regulation will present a more extensive top-down and bottom-up approach to regulation by whichever body replaces the FSA.
We have seen the first test of the existing Basel II regulations, which 98% of institutions in Europe has passed, the greatest level of exceptions being in Spain, where lending was highly property-biased.
A leading banking economist made clear to me a few weeks ago that the impact of the new implementation of Basel III regulation means that liquidity ratios will remain tight or will even tighten over the next few years. This will further exacerbate the supply and demand gap of commercial funds, and this trend may continue to worsen, despite government initiatives.
If what you have read seems like something that doesn’t concern you, you are wrong. You have got to take the initiative. The train is already on the track and you need to be standing at the station to board.
That is to say that we think the future of the UK commercial market will become more advice driven. You need to understand the position that the institutions will be in. More dialogue between broking and banking will be necessary. You will need to take on and understand about risk profiling and what is and is not acceptable. Clients out there still have a mental block, feeling that there are niches in the system which their deal can somehow creep through. These niches do not exist and are works of fantasy.
The client will have to adhere to the new regulations and environment or be without funding. It is our job to make sure they understand this and that we are aware and fully compliant with the changes that the market will bring.