Banks running scared as Basel group increases reserves ratio

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.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

Ashdown Group: Training Programme Manager - City, London

£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

Day In a Page

Where the spooks get their coffee fix: The busiest Starbucks in the US is also the most secretive

The secret CIA Starbucks

The coffee shop is deep inside the agency's forested Virginia compound
Revealed: How the Establishment closed ranks over fallout from Loch Ness Monster 'sighting'

How the Establishment closed ranks over fallout from Nessie 'sighting'

The Natural History Museum's chief scientist was dismissed for declaring he had found the monster
One million Britons using food banks, according to Trussell Trust

One million Britons using food banks

Huge surge in number of families dependent on emergency food aid
Excavation at Italian cafe to fix rising damp unearths 2,500 years of history in 3,000 amazing objects

2,500 years of history in 3,000 amazing objects

Excavation at Italian cafe to fix rising damp unearths trove
The Hubble Space Telescope's amazing journey, 25 years on

The Hubble Space Telescope's amazing journey 25 years on

The space telescope was seen as a costly flop on its first release
Did Conservative peer Lord Ashcroft quit the House of Lords to become a non-dom?

Did Lord Ashcroft quit the House of Lords to become a non-dom?

A document seen by The Independent shows that a week after he resigned from the Lords he sold 350,000 shares in an American company - netting him $11.2m
Apple's ethnic emojis are being used to make racist comments on social media

Ethnic emojis used in racist comments

They were intended to promote harmony, but have achieved the opposite
Sir Kenneth Branagh interview: 'My bones are in the theatre'

Sir Kenneth Branagh: 'My bones are in the theatre'

The actor-turned-director’s new company will stage five plays from October – including works by Shakespeare and John Osborne
The sloth is now the face (and furry body) of three big advertising campaigns

The sloth is the face of three ad campaigns

Priya Elan discovers why slow and sleepy wins the race for brands in need of a new image
How to run a restaurant: As two newbies discovered, there's more to it than good food

How to run a restaurant

As two newbies discovered, there's more to it than good food
Record Store Day: Remembering an era when buying and selling discs were labours of love

Record Store Day: The vinyl countdown

For Lois Pryce, working in a record shop was a dream job - until the bean counters ruined it
Usher, Mary J Blige and Will.i.am to give free concert as part of the Global Poverty Project

Mary J Blige and Will.i.am to give free concert

The concert in Washington is part of the Global Citizen project, which aims to encourage young people to donate to charity
10 best tote bags

Accessorise with a stylish shopper this spring: 10 best tote bags

We find carriers with room for all your essentials (and a bit more)
Paul Scholes column: I hear Manchester City are closing on Pep Guardiola for next summer – but I'd also love to see Jürgen Klopp managing in England

Paul Scholes column

I hear Manchester City are closing on Pep Guardiola for next summer – but I'd also love to see Jürgen Klopp managing in England
Jessica Ennis-Hill: 'I just want to give it my best shot'

Jessica Ennis-Hill: 'I just want to give it my best shot'

The heptathlete has gone from the toast of the nation to being a sleep-deprived mum - but she’s ready to compete again. She just doesn't know how well she'll do...