Bank capital requirements remain an important consideration for financial institutions as regulators continue implementing reforms designed to strengthen the global banking system. Banks have raised concerns that significantly higher capital requirements could restrict their ability to lend, invest in technology, and pursue other growth initiatives.
Guidance from the Basel Committee on Banking Supervision suggests regulators intend to avoid significantly increasing overall capital requirements as they finalize remaining post-crisis reforms. That approach could provide banks with greater clarity when determining how much capital must be reserved for regulatory purposes and how much can potentially be deployed elsewhere.
Global banking regulators pledged to refrain from further tightening capital requirements with new rules to be finalized in 2016, dispelling industry fears that triggered intense lobbying efforts over the past year.
The Basel Committee on Banking Supervision doesn’t plan to raise capital requirements across the board in the remaining projects of its post-crisis bank rule overhaul, it said Jan. 11 after a meeting of its oversight body, chaired by European Central Bank President Mario Draghi. The group, which includes the Bank of England and U.S. Federal Reserve, said it will assess the potential costs of any additional action.
“The committee will conduct a quantitative impact assessment during the year,” the group said in a statement. “As a result of this assessment, the committee will focus on not significantly increasing overall capital requirements.”
Basel’s slate of rules for this year, including a review of trading risks that the committee endorsed on Jan. 10, have faced heavy criticism from bankers, who say onerous new capital charges would crimp their ability to lend. The overhaul of how banks value risky assets has led industry executives to warn a regulatory onslaught — sometimes referred to as Basel IV — is still ahead, even after the last decade of new rules designed to prevent another market meltdown.
Capital Clarity Could Give Banks More Investment Flexibility
The Basel Committee’s recent guidance suggests an opportunity for financial institutions to reinvest capital earmarked for expected stricter capital requirements. This should allow financial institutions the ability to expand their loan portfolios and invest more capital for process and systems improvements, including core and channels systems upgrades.
Greater certainty surrounding bank capital requirements could allow financial institutions to make more confident decisions about how they allocate available resources. Capital that might otherwise have been reserved in anticipation of substantially tougher requirements could potentially support lending, technology investments, and operational improvements.
For banks facing growing pressure to modernize their core systems and customer-facing channels, that flexibility could be particularly valuable. Although financial institutions will still need to monitor the Basel Committee’s remaining regulatory work and quantitative assessments, avoiding significant increases in overall capital requirements could provide banks with additional capacity to invest in both their loan portfolios and the technology needed to remain competitive.
Overview by Ed O’Brian, Director, Banking Channels Advisory Service at Mercator Advisory Group
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