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It’s supposed to be good news for big banks. New measures that will start to be phased in next year under the Basel II accord are expected to reduce overall minimum capital requirements. The significant investment in systems required to benefit from the new regime should also produce better risk management – all this, of course, for those who can afford it. For these banks, regulatory capital savings could boost return on equity and, if they are allowed to withdraw capital, permit a return of funds to shareholders.
That is a big if. For one thing, regulators are sensibly making it clear that they will not allow a potentially unsettling rush to withdraw capital. Further, rating agencies such as Standard & Poor’s have said they would continue to rely partly on their own measures. So the large and well-capitalised UBS, for example, expects the effect of Basel to be neutral, both because its national regulator required it to be very conservative, given its importance to the Swiss economy, and because the bank itself wanted to maintain its high credit rating.
Even without the ability to withdraw capital, a more favourable treatment of secured lending should mean that returns in some business sectors, such as mortgages, improve, freeing up capital for use in other areas. The latest study by the Basel committee shows the minimum required capital for large, diversified European banks would on average fall by 7.7 per cent. Requirements for some residential mortgage portfolios, however, could be reduced by as much as 65 per cent, according to Keefe, Bruyette & Woods. In practice, the prudent stance of domestic regulators may mean that the scope for pure mortgage lenders to take advantage of the theoretical benefits is less than for big, diversified banks. Add in the two-speed approach of US regulators, and the result may be international standards that actually increase national differences.
As for reaping the rewards, it is going to be a slow and arduous process. No wonder investors aren’t yet giving banks any credit for this good news.