A step too far for banks?

Published on Business Spectator, by Stephen Bartholomeusz, Oct. 11, 2010.

There is an interesting and important question that re-emerged in the wake of the IMF and World Bank meetings at the weekend. How will the world’s bigger banks and their shareholders respond to the myriad of new capital and liquidity requirements?

The banks’ international lobby group reiterated at the weekend that the banking reforms would have a deleterious effect on economic recovery, saying they would reduce global growth by more than three per cent over the next five years despite the protracted timetable for their introduction.  

The banks appear to have been alarmed by the recent proposal by the Suisse authorities that their two systemically important banks, UBS and Credit Suisse would have to hold core capital of at least 10 per cent of their risk-weighted assets and additional capital resources of up to another 9 per cent. There are similar proposals for capital surcharges on systemically significant institutions in the US … //

… Banks certainly believe that they have to recover their pre-crisis returns on equity, or something approaching them. Last week both the National Australia Bank chairman Michael Chaney and ANZ chairman John Morschel talked about the need for growth to sustain their share prices and referred to the pressure that created to expand offshore.

One could conclude from that the natural reaction from the major banks to being forced to hold a lot more capital and liquidity will be to try to defend their ROEs by reducing their low-return activities and pursuing higher returns by accepting more risk – albeit perhaps a different type of risk to those that produced the financial crisis.

There are sound strategic reasons why the Australian banks would seek to expand offshore, particularly into Asia, to both diversify their balance sheet and to tap into the much higher levels of growth being experienced by those economies.

Whether we want a system, ultimately (as the financial crisis demonstrated) back-stopped by the taxpayer, that adds pressure to natural inclination and forces a more aggressive pursuit of offshore expansion, however, is an issue that could be debated and certainly needs to be monitored.

The regulators need to get the balance right between requiring the banks to reduce the leverage in their balance sheets to levels that represent less risk without so undermining their returns to shareholders that the banks feel obliged to search for higher-risk and higher return opportunities.

The Basel III measures themselves appear broadly reasonable. It is the raft of extra measures individual regulators are advocating that may prove a potentially dangerous step too far. (full text).


China raises big banks’ required reserves, Oct. 11, 2010;

EU-Aufseher zeigen Bankern die Zähne.

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