The German banking association warns against the new capital requirements for financial institutions under the Basel III regulations (European Capital Requirements Directive) that is supposed to take effect on January 1th 2011. According to the German banks the new rules may result in them cutting lending by £1 trillion.
“Have you any idea of how much there is to do? Do you ever think of that? Of course not, you’re all too busy sticking your noses into every corner, poking around for things to complain about, aren’t you? Well let me tell you something – this is exactly how Nazi Germany started. A lot of layabouts with nothing better to do than to cause trouble.”
Basil Fawlty (John Cleese)
Like the hyperactive hotel owner, Basil Fawlty, in the famous BBC sitcom “Fawlty Towers,” European regulators are desperately trying to keep their financial house in order. It ought to be an easy task, if it wasn’t for those damn house guests! Especially the Germans…
The Basel III agreement is accepted by all the other members of the EU committee, except for the Germans.
The German banking association says that the passing of Basel III would force them to raise over €100 billion in new capital, according to Frankfurter Allgemeine.
The most crucial rule is the new leverage ratio, which limits the amount of credit to 33 times the bank’s core capital.
At the moment German banks are financed by all kinds of strange hybrid types of capital, which are technically counted as equity for the purpose of regulation, but which are, in reality, more like bonds.
Will Force A Recession
The German banking association says if the banks will need to raise the €36 billion by January to meet the new requirements.
If they fail, they would have to cut lending by €1000 billion, which would effectively constitute a credit crunch, and would force a recession.
The Germans wants the new rules to be implemented, not within six to eight years as proposed by the Basel committee, but in 10 to 12 years.
This is – at least partly – the reason the German government still expresses reservations about the Basel III agreement.
This just goes to show where the “dog is buried” when it comes to Europe’s financial institutions.
An Invisible Credit Crunch
The German banking association warns of another credit crunch.
Well, I think it’s a bit too late for that.
Monday, the ECB announced one sole bank was allotted $60 million via its FED-swap facilitated liquidity providing operation.
In a comparable operation last week, the ECB announced that just one, (probably the same bank), had requested $40 million in a dollar-denominated funding from the ECB.
The point is not that just one bank requested such a paltry sum of capital to last it for another 168 hours.
But this is a strong indication that the funding situation in Europe is so bad that a bank is unable to get a relatively small token of $40 million in the interbank market or via traditional means, and is forced to beg for money at the lender of last resort – the European Central Bank.
Furthermore, the fixed-rate on the operation came in at 1.19% – nearly 4 times the rate allegedly charged for 3 Month LIBOR, which yesterday came in at around 0.30%.
Governments Need £80 Billion This Month
Another evidence of the ongoing recovery/credit crunch is the fact that European governments plans to raise another £80 billion in September, compared with £43 billion in August.
Padhraic Garvey, head of rates strategy for developed markets at ING Financial Markets, said: “We are heading into a critical period as the chances rise that a government may fail to raise the money it needs.
“Spain, Portugal and Ireland are the obvious ones to worry about. Are investors willing to stay long, or buy the debt of these countries? I’m still not seeing investors willing to buy into the periphery.”
Some strategists say the return of most investors from holidays this week could increase volatility in these markets because many have put decisions on their portfolios on hold during the summer.
With most investors back at their desks, some could start selling peripheral debt in the coming weeks, particularly as the outlook for the global economy has deteriorated. In spite of some better than expected data out of the US last week, worries about a double-dip recession have increased.
But other strategists insist governments will have little difficulty in funding themselves, even if they have to pay higher premiums or yields to attract investors. They say countries such as Portugal and Ireland have already raised most of the money they need this year.
Government bond yields of the peripheral countries, however, may come under further selling pressure.
The Fawlty Towers
The new Basel III regulations is supposed to be a “fire extinguisher” aimed at the evaporating confidence in the financial markets.
However, according to the Institutional Risk Analyst, the new rules might backfire – big time.
See also: Will Basel III Crush the Global Economy?
The German banking association are complaining about the overall capital requirements, but I seriously doubt that this is the only reason they’re trying to avoid them.
Not To Be Mentioned
Because there’s another little detail, not mentioned by any banker, called “Article 122a” that requires European credit institutions that invest in structured finance securities to know what they own.
It also lays out explicit penalties if a European credit institution does not obtain sufficient data regarding an ABS to satisfy regulators that the buyer fully understands the security.
Here’s a Q&A about Article 122a, provided by Richard Field of TYI LLC.
Now – that’s really scary!
Related by the Econotwist:
- Banks await final rules on capital (telegraph.co.uk)
- German FinMin says will not block Basel III (reuters.com)
- Will Basel III really deliver? (blogs.reuters.com)
- German Banks May Need to Raise $135 Billion on Rules (businessweek.com)
- The Basel III jockeying continues (blogs.reuters.com)
- Basel vs Barclays (ftalphaville.ft.com)
- Bankers Gather to Fend Off Harsher Regulation (dealbook.blogs.nytimes.com)
- G20 delay on Basel III bank curbs (guardian.co.uk)