(UBS) Basel Wants Big Banks to Store More

On Saturday, the oversight body of the Basel Committee on Banking Supervision proposed new rules that would force the world’s biggest banks to hold extra capital on their balance sheets as protection and prevention against global financial crisis, the Associated Press reported. The targeted banks are those that could threaten global economy if they collapse.

This extra capital requirement is an addition to the set of minimum capital standards, known as Basel III, proposed by the regulatory officials of more than two dozen countries in 2010.

As most of the major large-cap banks seem to comfortably maintain the minimum capital norms mandated by the Basel Committee, they might not hesitate to take more extravagant risks in their efforts to grow further. As a result, it was required to force these banks to stock up additional capital reserves so that they can confront financial turmoil, if they create any.

To What Extent?

Under the rule proposed by the Group of Governors and Heads of Supervision, mega banks world over would have to maintain an extra 1% to 2.5% of capital on their balance sheets in addition to Basel III mandate of 7%. The percentage will vary depending on the size of their balance sheets. Based a particular bank’s importance and position in the overall financial system, the Group of Governors will set a method to identify target banks.

The Basel Committee will allow the target banks three years –– 2016 to 2018 –– to meet the new capital requirements.

The Committee was initially contemplating placing as much as a 3.5% capital surcharge on these banking heavyweights. However, the surcharge has started at a lower percentage. Depending on the size of these banks, links to other lenders and the growth scenario, the surcharge could increase.

The Swiss government was an early bird, proposing to increase the minimum common equity requirement to 10% for UBS AG (UBS) and Credit Suisse Group (CS).

Are Countries Okay With This?

Following the circulation of drafts earlier this month, some countries were pressing the Committee to be less strict with the proposed requirements.

Most likely, these countries are scared of losing their growth momentum as the extra capital requirement would restrict their systemically important banks to expand even more. But this is again debatable. Wouldn’t this supernormal growth of big banks increase the odds of collapse again?

Safety Never Hurts!

A weak capital level is always a threat to worldwide economic well being. Needless to say, this extra capital requirement for biggest banks would act as building blocks of the still unstable world economy, with fewer bank collapses and less involvement of taxpayers’ money for bailing out troubled financial institutions.

Regulators and bankers are bound to disagree over the extent of positive impact from the new capital rules as there remain other lingering concerns, including a high unemployment rate, continuation of residential and commercial real estate loan defaults and liquidity challenges. However, many big banking names that run on lower capital ratios will still be forced to maintain higher capital standards, reducing their growth ventures.

It’s true that the Basel requirement would slow down the big banks. Then again, a slow but steady growth is always better than dashing toward yet another financial catastrophe.

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