On September 12th 2010, the Basel Committee endorsed the next piece of their master plan. Having originally released details on July 26th 2010, the Basel III Accord was revealed and aspired to once again make the banking system safer by putting measures in place to avoid a repeat of the “worst recession in over 100 years” (Ed Balls, Shadow Chancellor).
The Basel II Accord was originally introduced in June 2004 to ensure that savers’ money was protected and that banks had a bit of a cushion to absorb unexpected shortfall from the potential inability to repay loans. Basel III was constructed using the same three-pillared framework, but was developed following the credit crunch. It strengthens the bank’s capital requirements and introduces new regulatory requirements on liquidity.
Basel III looks to define new capital target ratios, or the amount of ‘ready’ capital a bank must have. Other changes include the increase in transparency, quality and consistency of the capital base. The new regulation states that banks must have available capital equivalent to 4.5% of assets. There is an additional requirement of 2.5% which is in place to withstand future stress.
The second major change from Basel II is the additional strengthening of the capital framework’s risk coverage. This includes strengthening the capital requirements for counterparty credit exposures, by raising the capital buffers to allow for these exposures. All the changes are in a bid by the committee to encourage the banks to raise their own capital buffer in times of a good economy, so they can be called upon in more troubled times.
Following the crisis of 2009, the banks are now working much closer with the regulators to ensure that it is not repeated. But, in reality, how will the banks and their recruitment processes be affected by the introduction of the Basel III Accord?
The long-term benefits speak for themselves: an estimated net benefit for European banks of 30% of GDP, equivalent to 10 trillion Euros. This prediction by UK economists comes on the back of the sizeable buffers that the new Basel mandates all major banks have at their disposal.
Having said this, the short and medium-term problems cannot be ignored. While the big banks are no longer ‘able to fail’, the IT implications and integration costs and resources threaten to drive down the financial sector’s profits.
Although the capital requirements are being introduced gradually, the scale of the change that banks will have to go through cannot be underestimated. Barclays are in the process of raising £3.3bn in order to cover the costs of Basel III – some of which will be used to cover the capital requirements, but a large amount will be spent on retraining and recruiting qualified staff.
The next piece in the Basel jigsaw will surely lead to increased hiring levels to accomodate the changes.
Oliver Gale is a Change Management Consultant for Marks Sattin.