Basel threat to cost of capital — banks

THE cost of capital for South African banks could rise by as much as 30% if they were to adopt the tougher Basel 3 regulations in their existing form, a leading banker has warned.

Increases in capital-raising costs could force banks to lower their appetite to lend, or make borrowing more expensive.

Under the Basel 3 rules, new global regulatory standards on bank capital adequacy and liquidity will be phased in between this year and 2019. Banks will have to hold higher capital buffers so they can absorb unexpected losses or shocks to the financial system.

Banks will have to hold capital equal to at least 7% of their assets, adjusted for risk, but the biggest banks are being threatened with an additional capital surcharge of 2,5%, which they are resisting as unnecessary.

The CEO of Standard Bank SA, Sim Tshabalala, said this week that while the rationale for strengthening capital buffers was accepted, the Basel 3 proposals could cause more harm than good for local banks. He said there was concern that the proposals could weaken the ability of SA’s big banks to compete across borders, and dent profits.

“Within SA, the proposed increases in regulatory capital due to the changed rules on over-the- counter derivatives and securitisation, in conjunction with potentially higher capital adequacy ratios, could result in an increase in the cost of capital to banks by an estimated 20%-30%,” he said.

SA’s new banking regulator, Rene van Wyk, was considering the level of discretion he would allow locally without breaching principles of global standards.

Local bankers, however, said SA’s big four banks already exceeded the Basel 3 capital ratio requirements, with core tier 1 capital ratios of more than 10%.

But they fall short on the liquidity coverage ratio, which requires them to hold easily traded assets to quench a hypothetical one-month sustained run on deposits.

They also come short on the proposed net stable funding ratio, which is intended to ensure that banks have the ability to fund their operations with more stable and longer-term funding — which is not available due to SA’s low savings rate.

Nedbank CEO Mike Brown said he hoped there would be greater clarity next year from the Reserve Bank on the national discretion to be applied to South African banks.

“(Next year) is a particularly important year for SA’s banks as the Reserve Bank will provide more guidance on its Basel 3 overlays and, in particular, its requirements on liquidity (and) funding ratios,” Mr Brown said.

Mr Tshabalala said the Basel 3 liquidity requirements could be even more challenging because of SA’s weak long-term savings.

“If the proposed liquidity requirements were imposed without local modification, we expect that this would severely affect the cost and availability of credit to the South African economy,” Mr Tshabalala said.

Standard Bank remained confident that the Reserve Bank would apply the new rules in a way that would continue to ensure the stability of SA’s financial system, which was crucial to promote job creation and growth, he said.

“To this end, we have the utmost faith that the Reserve Bank will exercise its national discretion in implementing Basel 3 in order to ensure that (local) banks remain internationally competitive and able to lend in support of the domestic economy,” Mr Tshabalala said.

Source- business day-

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