G20 Finance Minister regulation changes will constrain new investment and require a strategy rethink
The G20 Finance Ministers meeting in London concluded some new principles for Bank supervision, that follows the predictable path we have been seeing. Here is a summary from BIS, and some additional analysis from Financial Times.
The key points that will drive banks to seek additional efficiences to compensate, are raised capital and liquidity requirements. Another key one is #4, the countercyclical buffer; in other words during good times put money away for a rainy day. These changes in particular will constrain new investment in lending and in anything that does not drive higher profits.
In any event this will require a serious strategy review, and again, this does not sound like a return to business as usual.
The Central Bank Governors and Heads of Supervision reached agreement on the following key measures to strengthen the regulation of the banking sector:
- Raise the quality, consistency and transparency of the Tier 1 capital base. The predominant form of Tier 1 capital must be common shares and retained earnings. Appropriate principles will be developed for non-joint stock companies to ensure they hold comparable levels of high quality Tier 1 capital. Moreover, deductions and prudential filters will be harmonised internationally and generally applied at the level of common equity or its equivalent in the case of non-joint stock companies. Finally, all components of the capital base will be fully disclosed.
- Introduce a leverage ratio as a supplementary measure to the Basel II risk-based framework with a view to migrating to a Pillar 1 treatment based on appropriate review and calibration. To ensure comparability, the details of the leverage ratio will be harmonised internationally, fully adjusting for differences in accounting.
- Introduce a minimum global standard for funding liquidity that includes a stressed liquidity coverage ratio requirement, underpinned by a longer-term structural liquidity ratio.
- Introduce a framework for countercyclical capital buffers above the minimum requirement. The framework will include capital conservation measures such as constraints on capital distributions. The Basel Committee will review an appropriate set of indicators, such as earnings and credit-based variables, as a way to condition the build up and release of capital buffers. In addition, the Committee will promote more forward-looking provisions based on expected losses.
- Issue recommendations to reduce the systemic risk associated with the resolution of cross-border banks.
The Committee will also assess the need for a capital surcharge to mitigate the risk of systemic banks.