The Bankwatch

Tracking the consumer evolution of financial services

Basel 3 has significant power to restrict banks and Canada shows indications of that

This highlights the significance of one key aspect of Basel 3.  The key part is that:

Global accord targets credit bubbles | ft.com

The agreement, struck last month, says that if a country decides its economy is overheated – based on the ratio of credit to gross domestic product – it can require banks within its borders to hold extra capital against potential losses.

Thus if your central bank decides the economy is being overheated and too much debt is being doled out, then the collective wrath of your own central bank and the others in the world will befall you.

“They’ve crossed a Rubicon,” said Barbara Matthews, a US-based regulatory consultant. “Up until now the Basel committee has been about ex-ante co-operation and making banks safe. They are now talking about reciprocity, and they are implementing a tool kit that blurs the line between regulation and economic policy.”

The agreement surprised many regulatory lawyers and observers who had expected fights to break out over how to combat bubbles and resistance to the cross-border provisions.

The deal is also remarkable for the trust implied by the reciprocal arrangements. If the UK imposes a surcharge, the US is honour-bound to do the same on the UK businesses of its own banks.

Its actually not a bad plan provided everyone sticks to the plan.  The Bank of Canada made interesting comments today about excessive debt that Canadians have incurred especially over the last 3 years. 

The question becomes:  when is debt too much and when should additional action be taken.  Canada has no overheating issue, but it has significant loan loss potential issues.  It is clear the Bank of Canada is aligning its ducks to be ready to take action against the Canadian banks and require additional capital if required, and thus invoke Basel 3.

Written by Colin Henderson

January 10, 2011 at 23:23

Posted in Uncategorized

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