Basel III

[Julia]

The following is an extract from an article in the Weekend Australian Business section by Andrew Inwood , CEO of Core Data (research organisation).

"The Australian Prudential Regulation Authority is determined to implement the Basel III reforms in Australia, a set of laws that fundamentally change the amounts and types of cash Australian banks need to hold and which make long term savings deeply unattractive to banks.

All over Australia, bank chiefs are working hard to provide solutions to wealthy savers to encourage them away from long term cash holdings and into other investment products before the laws take effect and affect the banks' lending ability and profits.

The sleeping asset classes in this segment are the SMSF term deposits and high interest savings accounts, worth an estimated $100 billion at December 31 last year. When Basel III is introduced, they will need to be invested somewhere else or their returns effectively reduced to zero."

Could someone expand on this?

Why would long term savings become unattractive to banks ? What does Basel III involve?

 

[trainspotter]

Basel III is supposed to strengthen bank capital requirements by increasing bank liquidity and decreasing bank leverage.With Basel III the new regulatory framework more than triples the volume of assets that banks and savings banks must set aside for possible losses. Banks must raise their total capital from 2 percent of risk-weighted assets under Basel II to 7 percent (the 4.5 percent minimum plus the 2.5 percent buffer). Stress testing gone crazy to try and avoid a run on the banks like what happened in Europe etc.

As to why it would hamper the long term interest savings would be due to these having a higher risk ratio as the owner of the funds can withdraw from the bank at any time thusly reducing the banks lending ability even though the assets get a "liquidity" based weighting varying from 100% for government bonds and cash to weightings of 0-50% for corporate bonds.

The main costs will be incurred by financial institutions in meeting the new capital requirements, which are likely to be passed on to bank customers through higher interest rate charges on loans,

http://www.sparke.com.au/sparke/new...ean_for_australian_financial_institutions.jsp

Hope this helps Julia.

 

[sydboy007]

Another issue could be that Bank Bonds will have a bail in clause. The GFC made bond holders believe they were immune to bad decisions by bank CEOs and they pretty much got their money back.

New bonds, like new Hybrids, will have bail in caluses so if APRA decides one of the majors in in deep financial doo doo they can force hybrids then bold holders to convert into equity.

How much that equity will be worth, who knows. It should hopefully make debt holders a bit more interested in what the banks are up to, and the banks will have to be a bit more conservative otherwise the risk premium they pay for borrowings will increase.

 

[sptrawler]

Basel III is supposed to strengthen bank capital requirements by increasing bank liquidity and decreasing bank leverage.With Basel III the new regulatory framework more than triples the volume of assets that banks and savings banks must set aside for possible losses. Banks must raise their total capital from 2 percent of risk-weighted assets under Basel II to 7 percent (the 4.5 percent minimum plus the 2.5 percent buffer). Stress testing gone crazy to try and avoid a run on the banks like what happened in Europe etc.

As to why it would hamper the long term interest savings would be due to these having a higher risk ratio as the owner of the funds can withdraw from the bank at any time thusly reducing the banks lending ability even though the assets get a "liquidity" based weighting varying from 100% for government bonds and cash to weightings of 0-50% for corporate bonds.



http://www.sparke.com.au/sparke/new...ean_for_australian_financial_institutions.jsp

Hope this helps Julia.

Good post, trainspotter

 

[Julia]

Hope this helps Julia.

Thank you, TS. It does.