Falcon Perspectives - September 2010
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Investment compass - September 2010
Viewpoint: Basel III - A milestone for increased stability in the global financial system
Initial market reactions to the new capital requirements for banks laid down at Basel III were positive. The new rules will make financial institutions more secure, and a more stable banking system will play an important part in the recovery of the global economy, Nevertheless, the sector has had to negotiate a long transitional period and bank equities remain risky.The G20 Summit in Seoul in November is set to approve the new standards. The financial crisis, which broke out in the early Summer of 2007, has clearly shown the need for stronger regulation in the financial sector. On the weekend of 11-12 September 2010, heads of central banks and regulators from 27 countries managed to agree new, globally applicable standards for banks’ equity requirements (Basel III).
The rules agreed in Basel are intended to help limit excessive risks and make the banks more resilient to external shocks. Financial institutions will in future have to back risky transactions with a significantly higher proportion of their own equity. The intention is that they should be able to survive a crisis by falling back on their own resources. It is envisaged that core capital (regulatory equity) will rise from the current level of 4 percent to 6 percent of risk-weighted assets, with an additional emergency reserve of 2.5 percent that can only be employed in emergencies. The majority share of the core capital ratio of 8.5 percent will have to consist of so-called “hard” core capital. This includes equity capital and retained earnings, but excludes tax credits, which were also included as part of core capital under the old rules.
The new global standards represent a typical compromise, reflecting what the 27 participant countries were able to agree. It was to be expected that the “blockers”, such as Germany and France, would have a greater influence than the “leaders”, such as the US or Switzerland, for whom the new rules do not go far enough. In reality, the financial sector could have been subjected to somewhat higher demands, given the lavish profits which are again being made in the sector. It is also no coincidence that French banks, which would have been affected to a greater degree by tighter rules, have shown the highest share price increases.
More of the Viewpoint
Investment Overview
Better US and Chinese economic data, as well as the fact that the planned capital standards for international banks are less strict than expected, boosted equities in September. Investors’ risk appetite however remains low, reflected in a new record high of the gold price and the persistent strength of the Swiss franc and the Japanese yen. The Japanese authorities are trying to stem the further appreciation of their currency.
Investment Overview