13 September 2010

AGB warns of target overshooting when introducing new capital and liquidity rules

Hans-Joachim Massenberg, the Association's Deputy General Manager, had pointed out that going too far with the Basel capital and liquidity regulation will jeopardise the economic recovery and the positive labour market trends.

He said it was true that the banking industry's arguments had been taken on board during the negotiations to date. The key point, however – and this had also been stressed by German supervisors – was to consider the impact of the new rules and regulations as a whole. The most important aspect was the minimum regulatory capital ratios. The current regulatory minimum for Tier 1 capital is 4%, but a 6% floor was assumed in the EU stress tests. "Banks face enormous challenges in this area," said Massenberg, "especially bearing in mind that the July measures alone would halve current Tier 1 capital ratios at some banks.

In Contrast, the AGB supports countercyclical buffers. "Nevertheless, a number of issues remain to be clarified, particularly with respect to precisely how the buffer will operate."

It was essential, stressed Massenberg, to introduce the new Basel framework in phases and over time. Otherwise there would soon be a run by banks on regulatory capital, which would have to be raised in the form of capital increases. "Since the capital market will probably be unable to respond and many banks have no access to the capital market, they need time to grow their capital base through earnings. This applies all the more given that the new requirements will reduce banks' profitability and hence attractiveness.

The Association reiterated its criticism of a general limit on leverage. "We consider a leverage ratio counterproductive," said Massenberg. A ceiling without any weighting of risk runs counter to the objective of stabilising the financial system.

After further emphasis on the proportion of bank profits will be siphoned off as levies( about 30% of post tax profits), he concludes that each of the Basel III measures to strengthen capital adequacy may well make good sense viewed in isolation. But taken together, especially with the planned levies, they risk placing too great a burden on the banks

© BDB - Bundesverband Deutscher Banken