No stand-alone view of Basel III
28. Feb 2011, Munich Financial Centre Initiative
Being discussed is how Basel III’s capital adequacy regulations will affect the financial sector and the economy as a whole. Known by its German acronym of “fpmi”, Munich Financial Center Initiative is calling for a holistic analysis of Basel III. This would encompass the other planned reforms. This in-depth investigation of the total impact of all these measures upon the banking industry, upon the non-financial segment of the economy and upon public sector finances – on both the national and the global level – is the only way of determining whether or not the measures will have any negative consequences. This investigation should comprise deposit insurance systems, bank fees and the planned financial transaction tax.
Principles of fair competition compel fpmi to also demand that the responsible parties ensure both the simultaneous promulgation of Basel III in the USA und in EU and the eradication of differences in how equity is defined. This will prevent the reoccurrence of the Basel II situation. As is well know, the USA’s commitment to implement Basel II – and to do so by 2011 - wasn’t made until the end of September 2009 at the G20 summit in Pittsburgh. This will be much later than the date upon which Basel II became binding in the EU. A similar discrepancy of timing in the case of Basel III would give rise to a “patchwork” of regulations yielding ways of performing arbitrage among supervisory systems, and thus causing distortion of competition among international financial centers. This would disadvantage Europe’s economy as a whole.
Basel III will increase Germany’s need for hard core capital by 73 billion €. This need cannot solely be met by reinvesting profits or by transforming silent participations into share capital. In cases in which these options do not suffice, the results will be an increase of the costs and a reduction in the amounts of loans outstanding. An essential way of getting a grip upon this greater need for equity capital, and with this not to depend upon the legal form in force for the bank, is to retain the recognition of silent participations as being hard core capital. There are no factual reasons for a dichotomy of classification between those silent participations invested in banks that are not incorporated as joint stock companies and those consigned to institutions whose legal form is that of a joint stock company. The sole determinant factor should be the nature of the capital instrument.
The Basel Committee has proposed the partial deduction of deferred tax assets from hard core capital. The Initiative rejects this proposal, as the recognition of such taxes in balance sheets has a substantial counter-cyclical effect and is thus stabilizing for the economy as a whole – as recently shown by the financial crisis.
The Initiative takes a positive view of the fundamental recognition of being core capital accorded by the Basel Committee and by the European Banking Authority to credit union credit balances. A Committee of European Banking Supervisors’ guideline promulgated in mid-June 2010, however, requires the option to be possessed by both executive and supervisory boards and by the responsible supervisory body of rejecting the termination or repaying of these balances. Urgently required according to fpmi are rules of transition contained in national legal codes and applying to the implementation of changes in articles of association.
The Initiative has also pointed out that the promulgation of the new equity regulations has to be accompanied by the enactment of grandfathering regulations sufficient to preclude any distortion of the supplying of credits to businesses. A role model could well be CRD II’s regulations on hybrid capital, which took effect as of the end of 2010. These stipulate that legacy issues not fulfilling the stipulations of the new regulation are to be accorded complete protection through grandfather provisions for the first ten years after promulgation of the new act. This protection will be lessened on a step-by-step basis until ceasing entirely in 2040.
Principles of fair competition compel fpmi to also demand that the responsible parties ensure both the simultaneous promulgation of Basel III in the USA und in EU and the eradication of differences in how equity is defined. This will prevent the reoccurrence of the Basel II situation. As is well know, the USA’s commitment to implement Basel II – and to do so by 2011 - wasn’t made until the end of September 2009 at the G20 summit in Pittsburgh. This will be much later than the date upon which Basel II became binding in the EU. A similar discrepancy of timing in the case of Basel III would give rise to a “patchwork” of regulations yielding ways of performing arbitrage among supervisory systems, and thus causing distortion of competition among international financial centers. This would disadvantage Europe’s economy as a whole.
Basel III will increase Germany’s need for hard core capital by 73 billion €. This need cannot solely be met by reinvesting profits or by transforming silent participations into share capital. In cases in which these options do not suffice, the results will be an increase of the costs and a reduction in the amounts of loans outstanding. An essential way of getting a grip upon this greater need for equity capital, and with this not to depend upon the legal form in force for the bank, is to retain the recognition of silent participations as being hard core capital. There are no factual reasons for a dichotomy of classification between those silent participations invested in banks that are not incorporated as joint stock companies and those consigned to institutions whose legal form is that of a joint stock company. The sole determinant factor should be the nature of the capital instrument.
The Basel Committee has proposed the partial deduction of deferred tax assets from hard core capital. The Initiative rejects this proposal, as the recognition of such taxes in balance sheets has a substantial counter-cyclical effect and is thus stabilizing for the economy as a whole – as recently shown by the financial crisis.
The Initiative takes a positive view of the fundamental recognition of being core capital accorded by the Basel Committee and by the European Banking Authority to credit union credit balances. A Committee of European Banking Supervisors’ guideline promulgated in mid-June 2010, however, requires the option to be possessed by both executive and supervisory boards and by the responsible supervisory body of rejecting the termination or repaying of these balances. Urgently required according to fpmi are rules of transition contained in national legal codes and applying to the implementation of changes in articles of association.
The Initiative has also pointed out that the promulgation of the new equity regulations has to be accompanied by the enactment of grandfathering regulations sufficient to preclude any distortion of the supplying of credits to businesses. A role model could well be CRD II’s regulations on hybrid capital, which took effect as of the end of 2010. These stipulate that legacy issues not fulfilling the stipulations of the new regulation are to be accorded complete protection through grandfather provisions for the first ten years after promulgation of the new act. This protection will be lessened on a step-by-step basis until ceasing entirely in 2040.