Basel III - Capital needed now, but let's take 10 years to get it

In Basel, Switzerland, global regulators agreed on Sunday new rules aimed at strengthening the existing capital requirements for banks.

The minimum common equity requirement will be raised from 2% to 4.5%. Banks will also be required to hold a capital conservation buffer of 2.5% to withstand future periods of stress bringing the total common equity requirements to 7%.

Regulators settled on a long time-line for implementing the new rules, with some of the requirements becoming fully effective only in 2019.

What I find confusing here is the reaction of markets, at least the first time out. There is a big rally in equities around the world. This seems not so much a celebration of new tighter risk rules and requirements, but more a sigh of relief that banks have so long a period of time to comply. Really?! What does that say about our new-found commitment to managing risk. While I can understand shareholders of any individual institution being happy that the firm does not have to run to the markets for fresh capital in a hurry, it seems to me that in the bigger scheme of things such a long period for compliance is a huge market negative. Wouldn’t we rather see our institutions rushing to beef up their capital positions, instead of having the facts tell us they are under-capitalized but can take 8 or 10 years or whatever (regulatory propensity to allow such compliance dates to slide even further is worth another safe bet).

I am not sure this first reaction can, or should, hold. If risk levels require higher capital ratios, let’s go get it now. 10 years is an eternity, and if you are short of capital now, surely you should be extinct by then.

Back from a break; market risk aversion remains exceptional

Back after a longish break - much has changed, yet in many respects very little has! Risk aversion is at an exceptional high across the board, but the implications of that are still quite unclear in the markets, and there is a huge amount of short-term flows that is contributing volatility and little else. Even as we grasp for any signs of life in the US economy, Europe is back in the spotlight for sovereign woes and banks debt holdings. The spreads between EU sovereigns have moved to levels that are a make-or-break challenge for EU politicians and central banks. Something has to give, probably starting with the currency.

All this in interesting stark contrast to what I saw in India for the past couple of weeks. Booming, construction everywhere, tremendous amount of middle-class consumer activity, and all this despite the horrendous state of domestic politics – very messy and noisy really!

Two big speeches coming up, at Moody’s Risk Practitioners’ Conference September 27 and at the CFA GIPS Conference Sep 29, both in San Francisco, and at venues that are a couple of hundred feet apart! And I am of course still doing my fire-and brimstone-stuff about paying heed to the lessons learned from this crisis, and at least muting the impact of the next one, since surely we will not avoid one altogether.

So, will be back soon, live. Meanwhile, stay at least risk-aware if not risk-averse