Tag Archives: Basel II

At The End of Another Decade

New Years Eve 2010 (around midnight): It’s not only another year, it’s also the beginning of a new decade. Looking back at the past 10 years, the stage is set for a mind-blowing decade of technological breakthroughs that have the potential to change or lives completely. unfortunately, we’re probably also in for a long period of financial instability and high levels of unemployment.

“It is possible that we are facing one of the most important decades in a very long time.”


I remember New Years eve of 2000; dot-com-mania, emerging markets,Y2K. However, I also remember 1990; deregulation, digital revolution and another collapse in our financial system. I think I’ve detected two major screw-ups over the last two decades.

I covered the stock market crash in 1987, as one of my first assignments as a financial reporter.

By 1989 economists and politicians had declared the troubles were over, the major  global economies was back on track, producing new jobs.

In my mind, the most memorable from headlines from 1991 was delivered by the Swedish newspaperDagens Industri.”

Like the page 2 editorial:

“Dear God, please cool down our economy.”

And the – now historical – headline from the day the Swedish bank central bank kicked up its key interest rate to 500%:

“Good Night, Sweden”

This was about six months before the crisis hit the Scandinavian banks like a Norwegian heat-seaking Penguin missile, and forced the governments in both Sweden, Denmark and Norway to take public control over the private banks.

They were downsized, sliced up, sold out and merged, and the result was five, six   major banks who orderly divided the Nordic home markets between them, and have so far managed to keep any serious competition out of the region.

All three governments still holds significant ownership in the Nordic banking sector.

The Scandinavian banking crisis was recently held up as an example on how to handle a crisis in the financial industry.

Well, we now have five or six banks in three small countries that have become so “systemically important” that they are “too big to fail,” and will have to be bailed out of “no matter what.”

On a global scale; the creation of financial companies that are of “systemically importance” so they cannot be allowed to default must be (at least one of the) “Biggest Screw-up of the Decade – 1990/2000.”

As for the decade now ending, not keeping up with the developments in the financial industry, allowing it to become an invisible, almost uncontrollable, monster, and not putting a stop to it, is a really heavy regulatory blunder.

In the aftermath of 2001, several financial companies and their executives were accused or convicted of fraud for misusing shareholders’ money, and the U.S. Securities and Exchange Commission fined top investment firms like Citigroup and Merrill Lynch millions of dollars for misleading investors.

Thinking back, it seems like we’ve been moving around in a circle.

Systemically we’re right back where we was in 1992, financially we’re in even deeper trouble.

The new international regulations, as they emerge in the final reports from the Basel Committee (Basel III), doesn’t provide anything that will make any significant and systemically changes.

So, my guess is that we’ll have to struggle with a dysfunctional financial market, debt and “systemically important”banks for still a long time – perhaps another decade.

Sadly, this means that the much debated economic recovery, in form of a helluva lot of new jobs, probably not is going to happen anytime soon.

I’m afraid it could take about another decade to get where we would like to be last year, in terms of labor market conditions.

But I’m also sure the next decade will bring a boom in one particular sector:

On this new years eve, we have more people using Facebook than Google, 60.000 new pieces of malware released on the internet every 24 hours and the banks are setting up high frequency information systems, with super fast connections from major central banks, financial authorities and government offices directly into their high frequency trading machines.

It’s all set for another golden age for computer engineers.

As far as the financial industry goes, it reflects the new market conditions imposed by law makers worldwide.

It’s not that amusing to engineer new financial derivatives, so the focus have shifted to the technical side.

The danger is that the financial markets grows even more complex and unpredictable, tied together in an unofficial, unregulated intranet of dark fiber cables.

And this goes beyond the markets and the economy.

Judging by the rapid pace of development over the last 10 years, the next 10 is definitively not gonna be slower.

With the so-called quantum computers just three to five years away, the computer technology, and our whole way of life, is destined for another evolutionary quantum leap, practically.

It is possible that we are facing one of the most important decades in a very long time.

I wish you all the very best.

Happy New Year!


I’d like to add a special greeting to all new readers/follower in 2010. Thanks for all your encouraging comments.

This summer the econotwis’t blogs (Swapper and Econotwist’s) blasted above  20.000 unique readers per month.

Many of you follow my Twitter, and I’m specially honored to welcome among my followers; the State of Israel, US Homeland Security and the EU Council.

Now that I got your attention; will you please tell the State of Kuwait to stop trying to hack into my computer!?


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Filed under International Econnomic Politics, National Economic Politics, Philosophy, Technology

Bankers Hail The New Basel III Regime

It’s been a great day for the financial industry. The announcement of the new rules on capital requirements by the Basel Committee Banking Supervision – also known as Basel III – was met with standing ovations from a number of industry representatives, Monday. The financials were also the major mover in today’s stock trading. Leading institutions like the US Federal Reserve, ECB, Goldman Sachs and Bank of America have all made statements, praising the new rules that will not be fully implemented until 2019.

“This action, in combination with the agreement reached at the July 26, sets the stage for key regulatory changes to strengthen the capital and liquidity of internationally active banking organizations in the United States and around the world.”

United States Federal Reserve Bank

Baudouin Prot BNP Paribas

CEO Baudouin Prot, BNP Paribas.

Today’s rally in financial stocks all over the world is most of all a relief rally. The result of the Swiss banking committee’s work with new requirements is precisely as the industry leaders expected. Not too strict, and with plenty of time to shore up the minimum of needed cash. But the best of all: We have now official, global laws that acknowledge the too-big-to-fail principal and makes sure they will be rescued if another crisis occur in the coming years.

Most of the big players in the financial sector gained between 3% and 6% in Monday’s stock trading.

Deutsche Postbank, however, fell almost 8% after Deutsche Bank AG offered between 24 euros and 25 euros a share to increase its stake in the lender. Deustche Bank, Germany’s largest lender, gained 1.7 percent after saying it would raise at least 9.8 billion euros ($12.6 billion) in its biggest-ever share sale to buy Postbank and meet the stricter capital rules.

The German banking association is also the only member of the Basel Committee who have made critical remarks on the new Basel III retirements.

See: Basel III And The Fawlty Towers

Rasmussen, Stiglitz, Stetter presents: BASEL III

A Significant Step

“The US federal banking agencies support the agreement reached at the September 12, 2010, meeting of the G-10 Governors and Heads of Supervision (GHOS). This action, in combination with the agreement reached at the July 26, 2010, meeting of GHOS, sets the stage for key regulatory changes to strengthen the capital and liquidity of internationally active banking organizations in the United States and around the world,” the FED write in a statement.

Chairman Ben Bernanke, US FED.


“The agreement represents a significant step forward in reducing the incidence and severity of future financial crises, providing for a more stable banking system that is less prone to excessive risk-taking, and better able to absorb losses while continuing to perform its essential function of providing credit to creditworthy households and businesses.”

“Today’s agreement represents a significant strengthening in prudential standards for large and internationally active banks,” Ben Bernanke & Co points out.


Full FED statement.

Positive Impact

Calculations done by Zero Hedge show that the the 3.5% minimum common equity ratio by 2013 means the leverage will be just under 30 times – or enough for every bank in the world to pull a Lehman, which blew itself up at roughly the same leverage.

(In comparison; US banks had a leverage of  “only” 20% before the crisis hit).

“All who think European banks will survive through 2019 with this type of leverage should look into investing in these great companies: New Century Financial, Countrywide, and IndyMac,” Tyler Durden at Zero Hedge comments.

But who cares about old trivial stuff like that?

Certainly not Bank of America:

“We think the numbers are in line with prior market expectations and the implementation period long enough and therefore not at all alarming. In fact, our initial read of the impact on banks is positive. Credit investors should look forward to a number of capital risings from European banks, as looks like is already happening. This should be very bullish for bank spreads, in our view,” BoA says in their happy greetings.

Here are some other highlights – taken completely out of context, of course:

“The Committee believes that large banks will require 2a significant amount of additional capital to meet these new requirements.” Oddly, they think that smaller banks already meet them. We’d not be sure that this is true, at least in Europe.”

“This looks quite bullish for us for calls of Tier 1’s, especially those after 2013. In the meantime, note that we have no concrete agreement on the new format of new bank capital instruments.”

“Note too that the government capital injections, even if they don’t meet the new format, are to be grandfathered to 2018, giving banks plenty of time to adjust.”

“We had thought that some kind of countercyclical buffer would have been built into provisioning (like in Spain) but it looks like its just being done via higher equity.”

“No change to the overall level of capital, but it’s hard to see anything other than a major de-emphasising of anything that isn’t common – as we were expected.”

Small Macro Risks

Also Goldman Sachs are pleased with Sunday’s Basel agreement, but perhaps a bit more uncertain about what the impact will be, if any.

CEO Lloyd Blankfein, Goldman Sachs.


“There are two crucial questions when trying to assess the macro-economic implications of the new regulatory environment for banks. 1) by how much will banks have to raise their capital on the back of these changes. 2) Will lending become more costly/rationed and what are the growth implications of this. Our banks team estimates that only 4 banks among the 47 European banks covered have a core tier 1 ratio of below 7% by 2012. While this looks reassuring, it is less straightforward, however, to assess what the figure for the whole banking sector – including the non-public parts of the banking sector – looks like. The head of the Dutch central bank Wellink is cited this morning as saying that banks would need “hundreds of billions” to meet new capital requirements, though the economy, according to Wellink, will not be impacted by this. It is not clear where these numbers are coming from and other ECB board members have not mentioned any figures when commenting on the new capital rules,” Goldman Sachs analyst Dirk Schumacher writes.

“Assuming that the banking sector as a whole would currently show a 4% ratio, as required under the old Basel II regime, the overall growth impact looks manageable.”

“Implementation will start in 2013 and will have to be finished by 2018. This should give banks sufficient time to adjust, arguing for an overall small macro impact of the new capital regime.”

Here’s a copy of the full commentary by Goldman Sachs.

No Problemo

In stores January 2011 (Limited Edition)

The US investment firm, Credit Sights, highlights that it is impossible to actually do any practical bank-by-bank analysis due to “the long lead-in period, lack of disclosure, and the remaining uncertainties over changes to certain risk weightings and allowable capital instruments, while new criteria are still being finalized.”

But that doesn’t stop the European bank analysts from analyzing themselves straight into a new golden bank area.

Here are some more happy thoughts, as collected by The Guardian:

Chris Weston at IG Markets: “Global banks will like the news that they have been given an extended period [to comply with the rules] and the fact that they’re not going to have to rush to raise capital.”

Gary Jenkins, analyst at Evolution Securities: “All other things being equal, an increase in capital for the banking sector is of course good news for bondholders and the combination of the new regulatory regime and the stress tests does seem to have restored some confidence in the sector as evidenced by the recent amounts of bond issuance.”

Financial analysts at Oriel Securities: “The final outcome on Basel III determined by regulators over the weekend looks positive for UK banks. UK banks at face value appear to comply well with the new guidelines.”

Eleonore Lamberty, analyst at ING Credit Research: “Currently, the majority of European banks will have no problem to meet the new requirements. For the handful of banks that would find it more difficult, the very lengthy implementation period ensures that any capital shortfalls can be addressed, possibly through retained earnings. The industry-wide expectation of significant capital-raising exercises has hereby become much less compelling.”

Joseph Dickerson at Execution Noble: “We believe that the market will be punitive to banks which don’t meet a core tier 1 ratio of 9.5% – 10% under new requirements by 2012. While this is somewhat arbitrary timing, our research has shown that the market is already applying a multiple discount to banks with weaker capital positions, and almost all of the banks in our coverage classify as “systemically important”.

And The Winners Are…. 

Andrew Lim, analyst at Matrix Corporate Capital, is even sure who’s going to be the winners and losers in the new capital regime.

(Quite obvious, really, since they are owned and controlled by their governments):

“Even without taking into account a phasing-in period, the large-cap commercial banks exceed the minimum common equity ratio (including conservation buffer) of 7% by 2012. We see this as a significant positive for the sector on a number of fronts,” Mr. Lim writes.

And continues:

This sets the stage for a capital return to shareholders, via special dividends and accretive buybacks.

Unlike the bank stress tests, we see the minimum capital ratios as reassuringly onerous.

For the first time, the capital strength of the sector can be compared on a like-for-like basis. We believe the market will appreciate the increased transparency that will come to the sector, which will lead to higher ratings for the banks (as was the case 30 to 40 years ago).

The return of excess capital might be limited by the implementation of a countercyclical buffer on top of the conservation buffer. The implementation of this is unclear at present. If applied in its most onerous form, we believe only the Nordic banks will have what could strictly be termed excess capital.

The Nordic banks (DnB NORD, Handelsbanken, and Nordea) are in the strongest relative position. We believe these banks will be in the best position to consider returning the most amount of capital to shareholders, and will be the earliest to do so as well.

Lloyds looks to us likely to have one of the strongest common equity ratios by 2012. It should be noted that this is due to its strong organic capital generation, combined with its plan to reduce RWA (ie shrink the balance sheet). Lloyds does not currently have a strong Basel III common equity ratio by our analysis (unlike the Nordic banks), so the market must have conviction that Lloyds’ management can deliver. Unlike the Nordic banks, Lloyds will not be in such a privileged position to return capital as early and must wait until it generates sufficient capital.

The Italian banks UniCredit and Intesa and Spain’s BBVA are in the weakest relative position, having common equity ratios which are just above 7%. We do not think they will seek to raise capital, since our analysis does not include the phasing-in period. However, they do not look like they will have excess capital by our analysis.

Santander, HSBC, Barclays and Standard Chartered appear by our analysis to be average compared to the peer group having common equity ratios of 8%-9%. These banks are comfortably above the minimum of 7%. They will be in a position to return some excess capital to shareholders in our opinion, but are not likely to do so as quickly (or as much) as for the Nordic banks.

Well, I’m not a financial analyst,  but I usually know who I’m talking about when I make my comments.

Unfortunately, it seems like Andrew Lim at Matrix Corporate Capital do not.

He mention DnB NORD as one of the best positioned Nordic banks.

But the fact is that DnB NORD is a Baltic zombie bank, owned (currently 51%) by the Norwegian bank DnB NOR.

Surely, just a little mix-up. Nothing to worry about. Everybody’s fine!

(At least until 2019..)

Related by the Econotwist:

Central Bankers Announces A Higher Form Of Capital Standards

Will Basel III Crush the Global Economy?

German Banks With More Than 200 Billion Euro In Faul Credits

European Banks Hunting For EUR 1,65 Trillion

Morgan Stanley: Governments WILL Default


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Filed under International Econnomic Politics, National Economic Politics