Basle 3 Agreement

The Basle Committe has announced an agreement for higher capital proposals. The agreement is, unsurpringly, somewhat watered down relative to earlier proposals and components such as a countercyclical capital buffer don’t seem to have much substance. Implications for the Irish banks seem minimal, as the total common equity requirements announced are the same as those set down by the Central Bank in its PCAR exercise.

23 replies on “Basle 3 Agreement”

I know that many will be disappointed that they didn’t go further. But I’m glad to see this question at least decided.

It would have been better in my book to have agreed higher standards to be implemented over a much longer time frame. But I guess that’s out of the question now.

Further, I think it’s not good to invest too much faith in BIS. BIS includes the banks too centrally in their decision-making. Unsurprisingly, up until now, the banks have generally opted for less supervision.

Incidentally, they are still accepting submissions on the conversion of debt into equity, which might be of interest to posters here.

Am I correct to assume that these are international minimum standards, and we can set our own higher standards for banks operating here?

Yes. These rules are mostly drafted to set minimum standards and allow any State to impose stricter rules.

However, rather than simple percentage levels, most of the proposal addresses the tightening of the definition of tier1 capital, common equity and other terms.

In practice, because capital is so mobile across borders, individual States generally find it impossible to have significantly higher levels of regulation than the agreed international standards.

That’s why the UK and Switzerland wanted stricter international rules. They know they’ll be on the hook if there is another blow-up, but they also know they can’t unilaterally impose a higher standard on their own banks than that which is global.

The problem is not really to do with the % capital buffer. Whether it is 4, 7 or 10% will not prevent another crisis.

The major problem is that systemic banks that are a prerequisite for the proper functioning of the wider economy are still engaging in risky behaviour in the full knowledge that they will not be allowed to go under.

Until governments forces a split between the trading and banking operations of all banks we will be prone to more crises.

@ bazza

Until governments forces a split between the trading and banking operations of all banks we will be prone to more crises.


There is going to be a penal requirement for additional capital for systemically important banks.

It’s not as much as we might have hoped for, but it is some sort of disincentive to maintain banks too big to fail.

@ George,

Anglo was the worst bank in the world yet it carried out very little trading. HBOS was not very far behind yet it was a retail bank as well.

Most of the bank failures were monolines. The notion that separating retail bankng from trading would have avoided the debacle is trite.


What is even more surprising is when the Regulators allow one person/family or Group to dominate the Board of a Bank. There are still cases of this practice going on in European Banks.


I take your point Ger, but I think the focus should be on the risk appetite of the banks and not just their size. At the moment the risk appetite is excessively high because the incentives are skewed. The coupling together of investment banking activities and retail banking activities is bad for society – this was recognised in Glass-Steagall but has been eroded ever since.

Last week Barclays, following the nomination of Bob Diamond for CEO, said they want to offer all their services under one roof. UBS and CS both ran “one bank” type programs throughout the last decade and presumably will continue. Same with Deutsche. These are all banks with an extensive retail network.

It’s probably a crass generalisation, but I find that there are essentially two camps on this.

Some countries (notably Germany, but also France and others) want to ensure that lenders undertake greater care in choosing who to lend to and how much. They are interested in minimising defaults. However, they resist increasing capital buffers as they see them as expensive and an invitation to reckless lending.

On the other hand you have countries (notably the UK, but also the US) who are unwilling to countenance regulating lending decisions, instead opting to make their banks preserve large capital buffers to fall back upon when things go belly up.

I personally don’t have a particular preference as long as the overall mix is coherent. It seems to be more cultural than specifically regulatory.

It does create national tensions though where you have risky lenders in the UK/US selling dodgy securities to poorly capitalised German banks, who then discover that the loans weren’t high quality. Bless them

It seems that this announcement (and indeed it has been going this way all year) is shifting the world order mroe towards the risky-lending, high capital model.

However, I’d submit that the so-called “high-capital” standards they’re talking about is still historically low by the standards of the risky-lending countries that it is modelled on.

I think increasing deposits as a share of loans lent (and thus reducing dependence on wholesale) is an important goal. The nature of the Irish economy may not lend itself to as high a level as Canada’s banks hold in deposits, but I think DIRT reform/abolition will have to be part of that.

@Mark Dowling
“I think increasing deposits as a share of loans lent (and thus reducing dependence on wholesale) is an important goal. ”
I agree with you that reducing dependence on wholesale is important, but I think the idea that deposits should make up the majority of funding is flawed. While our government in its idiocy thought that guaranteeing existing bondholders and sub-debt holders was a good idea, Professor Honohan made the excellent point “where would they go?”.

Depositors move at signs of instability (even where none exists). They are as flighty as interbank loans. Witness the sequential waves of capital flight from Irish banks, regardless of guarantees in place. Much of what is listed as deposits is interbank funding in disguise anyway – it is institutional deposits at slightly longer terms and slightly higher rates than interbank funding, so I think the difference is somewhat moot.

Unless, of course, you are talking about limiting the size of the banking sector to the amount of organic deposits in the county?

Canada have done some things right. They also have some risks. One of the reasons that banks can simply fund using deposits (as I understand it) is that they can sell mortgages to an explicitly state-backed GSE. My belief is that Canada is a Vancouver property crash away from a banking crisis.

Would you put a dog’s nametag on deposit in an Irish bank in the current environment?

I’m not an expert so please be gentle in replying!!

Is it still not a ‘one size fits all’ capital regime? Am I right in saying that it’s a flat 7% of risk bearing assets no matter what the asset?

Surely a weighted approach penalising more risky assets would be more appropriate?

I believe it is 7% of no-risk assets, like, er, sovereigns, that are to make up the equity capital. I’m no expert either though!
(I haven’t read the final documents yet, but the original proposal was to have real cash moolah available for losses rather than navel lint).

The standard will be 7% equity to risk weighted assets. It could be up to 9.5% if the counter cyclical buffer is imposed. This has been hardened up. A lot of non equity instruments such as prefs will be taken out of the calculation of capital as will some intangible assets. It is a better measure than the last measure.

Assets are weighted according to their risk…Germans sovereigns as the least risky & corporate/SME risk weightings are higher. ALL ASSETS ARE NOT THE SAME.


Do you have a link to the latest version of the rules?
In the preliminary version there was all sorts of stuff excluded:
minority interests
tax deferred assets
net derivative gains

Basically anything that wasn’t a tangible asset. I know there was some lobbying about some of those, but haven’t seen the results anywhere?


Loads of stuff on the BIS website. Probably best to trawl through it youself & follow your own nose. The original proposals re your laundry list of items were amended in part. Effectively, the outcome is a compromise between US/Japan/European regulators and their client banks.

Anyone who believes that this will alter what is baked into the international banking “scheme”. is going to lose whatever they bet on that belief. Like the “Stress Tests” they are window dressing.

Derivatives are all in SPVs. Oh what are those? Well no one really understands them. They are all different and none are regulated. But they all mean that the liabilities are off balance sheet and any gains can either be booked or diverted.

So we still will not know what banks actually owe until we get the breathless messenger saying that the barbarians are at the gate. As with Lehmans. Some will know hours before that. Expect unusual movements in what used to be free markets. So many rules are broken that the regulators simply cannot follow them all. As the system is so broken, most who get away with a good haul will simply retire.

The money making machine, known locally as banking, but encompassing many other activities all based on cheap real or fake credit, is now broken. That is a good thing. Growth will not occur except in Ireland’s manufacturing sector, for decades.

All agreed?

Drat. I was hoping there was a nice idiots guide somewhere. It took me the best part of an evening to trawl through the original proposal!

@ Hogan

“sovereigns, that are to make up the equity capital … real cash moolah available for losses rather than navel lint”

There’s a lot of confusion about this issue. Equity capital is not a specific set of ringfenced assets such as sovereign bonds. Put simply, it is the gap between the assets and liabilities (whatever their composition).

Where the composition of assets comes in is that if you are holding riskier assets, then you need have more equity, i.e. you need to have a greater gap between assets and liabilities if your assets are more risky. If you want to achieve this by owning more risky assets, you are free to do so.

Equity capital is also not real cash moolah. There is a common confusion of the concepts of liquidity and solvency. I try to explain the difference in teaching notes here

Thanks for that Karl, will take a look.

I agree I’m simplifying but, for the sake of argument, it isn’t going to be enough to have lots of, say, IRS to offset the risk weighting of your other assets anymore. No?

So, in effect, banks will have to hold more tangible low risk assets (closer to money good).

Or is that way too simple a take on it?
(I’ve to get through parts 1&2 first, remember!).

For anyone interested Martin Wolf has a salutary assessment of Basel III in today’s FT. / Columnists / Martin Wolf – Basel: the mouse that did not roar

There are some interesting embedded links in the piece, in particular a paper by Martin Hellwig and also one from Andy Haldane.

By the way not all banks are on Basel II, American banking still applies Basel I.

Comments are closed.