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Banks stocks rise after regulators agree on new capital rules

BASEL, Switzerland — Bankers and analysts said new global rules could mean less money available to lend to businesses and consumers, but praised a decision to give them plenty of time — until 2019 — before the so-called Basel III requirements come into full force.
Switzerland Central Banks Basel Rules
The building of the Bank for International Settlements

BASEL, Switzerland — Bankers and analysts said new global rules could mean less money available to lend to businesses and consumers, but praised a decision to give them plenty of time — until 2019 — before the so-called Basel III requirements come into full force.

The rules, which will gradually require banks to hold greater capital buffers to absorb potential losses, are likely to affect the credit industry by imposing stricter discipline on credit cards, mortgages and other loans.

Requiring banks to keep more capital on hand will restrict the amount of loans they can make, but it will make them better able to withstand the blow if many of those loans go sour.

European Central Bank Chairman Jean-Claude Trichet said the leading central bankers who worked on the agreement, reached Sunday in Basel, were convinced that the new measures were a “fundamental strengthening of global capital standards” which would make a “substantial” contribution to economic stability and growth.

Trichet declined to estimate how much money banks would need to raise to meet the new requirements.

He also said he had “full confidence” that the measures would be implemented by U.S. authorities, despite their not fully having adopted the last round of Basel rules.

In some countries, where national regulators were quick to clamp down on risky lending practices following the credit crunch, the new rules may actually release some pent up capital banks had been holding back in anticipation of far tighter regulation, said analysts.

Under the new rules, known as Basel III, the mandatory reserve — known as Tier 1 capital — would rise from four per cent to 4.5 per cent by 2013 and reach six per cent in 2019.

In addition, banks would be required to keep an emergency reserve known as a “conservation buffer” of 2.5 per cent.

In total, the amount of rock-solid reserves each bank is expected to have will be 8.5 per cent of its balance sheet — but not until the end of the decade.

Canadian banks are already among the most well-capitalized in the world in terms of both the quality and quantity of capital and came through the financial crisis in relatively good shape.

Their major lobby group, the Canadian Bankers Association, was cautiously optimistic about the new rules, calling them “reasonable” but only “two pieces of a very intricate puzzle” with many details still outstanding.

“It’s a great foundation but there’s still devil in the details,” said CBA chief executive Nancy Hughes Anthony.

“There’s still a number of details outstanding in order for each bank to know exactly, 100 per cent, what the impact is going to be,” she said.

“Just for example, there are things called counter-cyclical capital buffers that remain outstanding, that people are still in a comment period on. Contingent capital is still an issue that is outstanding.”

As well, the whole package still has to go to the G20 finance ministers in October and then to the G20 itself in November.

Hughes Anthony also said another major factor is the role of home regulators — in Canada’s case the Office of the Superintendent of Financial Institutions — and the interpretation they give to the new rules.

“The positive thing (about Basel III) is there appears to a reasonable phase-in period for this and I think that is a recognition by the policy-makers not to go too fast and create an upheaval in markets. So I don’t think you’re going to see that sudden disruption that some people feared,” she said.

Relief at the generous time frame and lower-than-expected minimum reserves lifted banking stocks across the board Monday.

France’s banking federation said French banks were “among those with the greatest capacity to adapt to the new rules.”

In a statement, the federation noted however that it remained concerned that the new rules would put “a strong constraint that will inevitably weigh on the financing of the economy, especially the volume and cost of credit.”

Down the line consumers could see banks tighten their rules on loans and possibly impose higher banking charges as financial institutions spend the next few years building reserves to meet the new regulatory requirements.

But Teresa Nielsen, an analyst at private bank Vontobel in Zurich, said consumers could also benefit. “The lower than feared minimum capital requirement and longer implementation time frame could potentially lead to banks being more open to give loans to companies and private people which again could improve the economic situation worldwide,” Nielsen said.

Deutsche Bank’s Chief Executive, Josef Ackermann, said he thought the Basel III package was a good one.

“I think the decisions that were taken are the right decisions, they go in the right direction, and I also believe the fact that they gave the banking industry so much time for implementation clearly reduces the effects on the real economy, which is also very positive,” he said.

“So it’s a well rounded good package that we fully support.”

Some major banks, particularly Switzerland’s two biggest UBS and Credit Suisse, will likely face additional requirements because of the threat their collapse would pose to the national economy, Nielsen said.

U.S. officials including Federal Reserve chairman Ben Bernanke issued a joint statement Sunday calling the new standards a “significant step forward in reducing the incidence and severity of future financial crises.”

The rules still must be presented to leaders of the Group of 20 forum of rich and developing countries at a meeting in November and ratified by national governments before they comes into force.

The Basel III agreement is seen as a cornerstone of the global financial reforms proposed by governments stung by the experience of having to bail out some ailing banks to avoid wider economic collapse.

— With files from The Canadian Press