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.