Banks running scared as Basel group increases reserves ratio

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The Independent Online

To the outsider, Basel is what passes for Switzerland's cultural centre: it is the site of the country's oldest university, and it is a tri-national city – with suburbs in France and Germany – which forms Switzerland's largest metropolitan area.

To bankers, however, it's the equivalent of Transylvania. It is the place that raises the hairs on the backs of their necks because it is in Basel that their supervisors meet and suck their lifeblood from them: the banks' ability to generate money by lending to others is curtailed by the international rules set out there.

Every pound that the Basel Committee of Supervisors says has to be held in reserve as "core tier one" or "tier one" capital is a pound that cannot be lent to homebuyers or small businesses, or anyone else.

And that Committee will tomorrow tell banks they have to hold back a lot more of this. It will also likely put restrictions on what assets can be counted as tier one capital.

At the moment, banks have to hold tier one capital of 4 per cent of their assets, after liabilities have been subtracted, of which 2 per cent has to be "core tier one". The new rules are likely to require them to hold nearly double this: the speculation is 7 per cent made up of 5 per cent at all times plus a 2 per cent "buffer" during the good times. The final rules won't be known until tomorrow, but some banks aren't hanging around until then. Shares in Germany's Deutsche Bank plunged yesterday as it lined up a share issue of up to €9bn (£7.4bn) for next week.

The cash raised will partly help to increase its stake in Postbank. But as European banks go, Deutsche is relatively weakly capitalised, so part of the cash will go towards making sure it can comply with the new standards. And Deutsche won't be the last. Analysts expect many similar cash calls over the next few months as other banks in Germany, Spain, Portugal and Greece follow suit. While they will be given time to get their houses in order, those that can will move quickly, if only to be to reassure skittish investors.

British banks are watching developments in relative comfort because the Financial Services Authority already requires that they hold twice the existing European minimum, and UK standards are still likely to be tougher than the Basel standards even after Sunday's announcement.

The most lightly capitalised bank is Lloyds (with tier one of 9 per cent) and this is still much more than what almost any bank held pre-crisis. The tier one ratio of just above 13 per cent that Barclays has (by this measure Britain's strongest bank), would, in the pre-crisis days, have had analysts, and investors, screaming. They would have called Barclays vastly over-capitalised back then.

Privately, banks (at least the European ones) argue that this is exactly what they are now. They point out that American banks have not even implemented Basel Two, the last set of rules in operation when the financial crisis was in full swing. Much less Asian banks. European supervisors argue that the America's failure to implement Basel Two was one of the major causes of the financial crisis.

And the strong capital base of the Europeans puts them at a disadvantage to rivals in other jurisdictions which can raise cash more cheaply and achieve better returns for themselves and their shareholders by being able to lend more. Angela Knight, head of the British Bankers' Association, said: "Once the new rules and requirements are in, this may well improve stability of banks and of the financial system.

"The transition, though, is the critical bit as the rules suck money out of the economy. Even though the UK banks are in a much stronger place than most on capital, the Basel changes need to be implemented over a long timetable and very carefully sequenced to avoid prolonging the downturn."

Ms Knight has a warning for those who will have to approach their banks for finance in future.

"A bank is like any other business – if its fixed operating costs go up, then so does the price of its product," she said. "All the changes are good from a stability perspective but add billions to the fixed operating cost of a bank. Inevitably, the cost of credit – what the borrower pays for money – will rise. The cheap money era is over."

Banks agree new reporting code

The British Bankers Association revealed yesterday that the UK's seven largest lenders had signed up to a new disclosure code that chief executive Angela Knight claimed went beyond all the current international rules.

The BBA said that its new code "sets out the best principles for clear and transparent information about the UK's largest lending institutions". Banks will undertake to provide high-quality disclosures in their annual and interim reports, and also to re-evaluate the disclosures given to ensure that they continue to be "relevant and of high quality". Banks have been criticised recently for producing huge reports containing vast amounts of useless information. But Ash Saluja, of law firm CMS Cameron McKenna praised the code as a good example of self-regulation.