Comments on: Basel III arrives A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: George_Lekatis Fri, 27 May 2011 15:05:31 +0000 This is just the first step for “too big to fail” (too big to understand also) financial institutions.

They must bear in mind that they will have to do more. Systemically Important Financial Institutions (SIFIs) should have higher loss absorbency capacity.

George Lekatis

By: creditplumber1 Wed, 29 Sep 2010 15:45:50 +0000 Gotcha. Thx

By: FelixSalmon Wed, 29 Sep 2010 15:29:20 +0000 Hi David — technically, the minimum level of Tier 2 capital always has been and always will be zero. When people like me talk about Tier 2 minimums, they mean Tier 2 or better, ie Tier 2 plus Tier 1. If you meet your Tier 2 minimum with Tier 1 alone, then you don’t need any Tier 2 at all.

By: creditplumber1 Wed, 29 Sep 2010 14:56:22 +0000 Hi Felix,

Just reviewing Tier 2 rules and I note you appear to refer to extremely high levels of Tier 2.
Under Basel II, rule of thumb was 4% tier 1 PLUS 4% Tier 2 & Tier 3 to reach 8%.
Tier 3 was (like level 3 assets) pretty meaningless so Cap Instruments that qualified will no longer eligible (unlike Level 3 assets). Tier 2 will probably comprise loss absorbing Capital Instruments with added conditionality as suggested by BIS last month that allows regulators to define an event which triggers conversion of debt to equity.. the so called ‘Bail in’.
Since Minimum Total Capital is 8% (ex. buffers) with Tier 1 min of 6% of which Common Equity must 4.5%, Tier 2 will therefore be around 2%+, there or thereabouts, not the 8%+ levels you refer to.
Kind Regards

David McKibbin

By: BaselDrei Wed, 29 Sep 2010 13:45:43 +0000 “Anyone looked into how this will impact the cost of bank services?”

A clear impact on margins is not seen yet. What I have seen is a 25bps extra margin for interest rates fixed in the range 6 to 10 years.

By: davew Mon, 13 Sep 2010 16:19:57 +0000 Anyone looked into how this will impact the cost of bank services?

By: PerKurowski Mon, 13 Sep 2010 04:02:19 +0000 Basel III keeps looking at the gorilla called perceived risk, while losing track of the ball.

In Basel III you will find that most of the capital requirements are “in relation to risk-weighted assets (RWAs)” and, since what is most wrong with Basel II are precisely the risk-weights, which for instance counts any investment or loan to a private triple-A rated client at only 20%, and which was precisely what drove the banks to stampede after the triple-A rated securities collateralized with lousily awarded mortgages to the subprime sector, and the risk weights have not been modified at all, let me assure you that the Basel Committee still has no idea about what they are doing. Frightening!

Basel III does mention that “These capital requirements are supplemented by a non-risk-based leverage ratio that will serve as a backstop to the risk-based measures described” but since that supplement seemingly will be small and what really counts are the marginal capital requirements for different assets Basel III does not provide a solution.

Fact is that if a bank lends to a small business then it needs 8 percent in capital but if it instead lends that money to the government of a sovereign rated AAA to AA then the bank needs no capital for the risk-weighted assets since the weight is 0%… this is sheer lunacy!

The members of the Basel Committee are all still so fixated with looking at the gorilla called “perceived risk” so as to completely lose track of the ball.

Per Kurowski
A former Executive Director at the World Bank

By: polit2k Sun, 12 Sep 2010 23:37:54 +0000 Thanks. Excellent review. FYI

By: Too_Late Sun, 12 Sep 2010 21:55:39 +0000 Well done, Felix! Basel III will certainly strengthen bank capital positions. However, there is a certain blithe assumption that raising capital requirements will result in an increase in bank capital. Capital ratios can be raised by increasing capital or reducing activities. Governments are counting on the former; I wonder if they will be pleased if the latter occurs.