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Banking on Basel loosening capital requirements

Sunday 28 March 2010 - by Luke Nelson

 A study suggests that regulators' focus on stringent bank capital requirements risks stifling economic recovery and warns against knee-jerk reactions

Many theories have been put forward as to the cause of the financial crisis but few have gained greater consensus than inadequate levels of high quality capital held by banks and other financial institutions.

As such, there have inevitably been moves to strengthen the banking sector by implementing a more rigorous framework of capital adequacy.

In December last year the Basel Committee for Banking Supervision published new proposals for capital requirements which could be in place as early as 2012.

The proposals, set out in consultations 'Strengthening the resilience of the banking sector' and 'International framework for liquidity risk measurement, standards and monitoring', introduced a number of measures for strengthening the quality of 'tier 1' capital held by banks and also put forward two new measures for liquidity coverage within both a long-term and a short-term stress period.

Basel Committee chairman Nout Wellnick says: "The capital and liquidity proposals will result in more resilient banks and a sounder banking and financial system. They will promote a better balance between financial innovation and sustainable growth."



Since the proposals emerged there have been a number of elements that have attracted criticism and will form the basis of responses to the consultations, which close on 16 April 2010. Discontent has been voiced from various quarters including academia, trade bodies, and the banks themselves.

Dr Simon Ashby is the author of a report published by the University of Nottingham's Financial Services Research Forum which suggests that regulators' focus on bank capital risks stifling economy recovery. Ashby suggests that more rigorous capital requirements may appear to provide a simple means of mitigating future crises, but in reality do not offer an effective solution. He warns of knee-jerk reactions coming from regulators after the crisis.

Ashby says: "There has been some sensible material produced by the Basel Committee but the proposals put forward in December are an overreaction to the situation."


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