Basel 3. Musings on inept regulation

With all the talk around about European bank stress testing and bank net interest margins contracting because of spiralling funding costs we thought it would be timely to consider the consultive documents surrounding the Basel 3 proposal.

In summary, if Basel 3 is implemented in its current draft form it will have a massive negative impact on banks globally. In particular, it will impact on the availability of term funding and the pricing of term funding. This has implications for the Australian banks because of their heavy reliance on term funding sourced from overseas. While we don't for a moment think that Basel 3 will be implemented in its current form, it is interesting nonetheless to critique the proposal with a view to gaining an understanding as to the motives behind it.

Without question the GFC created enormous problems for the banks globally as they scrambled to fund their gorged balance sheets. Not only was it apparent that short term funding was extremely difficult to get but the capital arbitrage opportunities and excessive leverage created by Basel 2 left the banks chronically short of capital. Clearly, these are the areas that the draft proposal is keen to address. We question whether Basel 3 is practical and sensible and conclude that it is indeed neither practical nor sensible and as such it will not be implemented in its current form. The question is which bits are likely be retained, which bits are likely to be modified and which bits are likely to be excluded. We discuss some of the possibilities.

If you would like to find out more please send an email to info@eiml.com.au

Other Research Papers include:

Collateralised Debt Obligations: Friend or Foe?

How the Debt Equity Hybrid sector fits into a Portfolio of Assets

Credit Spreads: Where are they heading?

What can go wrong?

'What if' analysis.