Strategic Treasury

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From London in 2012 to Basel in 2013 Over the next five years, the regulatory and market environment for banks, and the institutional customers with whom they work, will become barely recognisable compared with the conditions that existed before the 2008-9 crisis. The Editor summarises the key elements of Basel III and looks how new regulation will affect banks and corporates alike.

From London in 2012 to Basel in 2013

by Helen Sanders, Editor

As I write this the day before the Opening Ceremony for the Olympic Games, it is hard to believe the transformation that has occurred in east London and in the venues around the UK in only seven years since London was awarded the Games. The banking sector is engaging in a similar transformation. Over the next five years, the regulatory and market environment for banks, and the institutional customers with whom they work, will become barely recognisable compared with the conditions that existed before the 2008-9 crisis. Many have argued that this is either a good or bad thing respectively, but change is inevitable and inexorable.

One of the most substantial new regulations is known as Basel III (or the Third Accord of the Basel Committee of Banking Supervision) which will have far-reaching implications for banks and their customers. Although Basel III is mentioned a great deal, primarily in the context that ‘things will change’, what this means in practice is less clear. This problem is exacerbated in that the details of Basel III have yet to be determined. However, with new capital adequacy requirements rolling out from January 2013 (with a deadline of 2019 that seems long but is unlikely to prove to be) Basel III is now an immediate consideration for banks and their customers.

Key elements of Basel III

The requirements of Basel III cover capital requirements, leverage ratios liquidity and systemic risk issues, but for the purposes of this article, we will focus on capital requirements and in particular, liquidity, which will have the greatest impact on the way that banks engage with their corporate customers. As Greg Kavanaugh, Managing Director, Head of Global Liquidity and North America Product Solutions, Bank of America Merrill Lynch summarises,

“Most large multinational corporations are aware of regulations such as Basel III, and they know that the intention is to make the banks safer. However, they have varying degrees of knowledge about the likely implications, such as how the cost of assets will increase, and liabilities become less generic, which will result in banks becoming more discerning about the business they conduct.”

Andrew Bailey, Director: UK Banks and Building Societies Division, Financial Services Authority (FSA) summarised in a recent speech,

“Why are we undertaking such wide-ranging reforms?  he simple answer, because we have had a major crisis, is not good enough as an explanation – it explains the timing of the reforms, but the substance of them requires more explanation… First, achieving a stable financial system will in turn enable the development of a strong, competitive system, and likewise will foster the strength of financial centres. Financial stability and competitiveness are not fundamentally in conflict; rather, the former is a necessary but not sufficient condition of the latter, much as stable low inflation is a condition of sustainable economic growth. The key point here is that our respective objectives of stability and competitiveness are fundamentally not at odds.”

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