Banks in Bullish Mood After Basel Revision

Terry Flanagan

Despite the big banks seemingly suffering from a barrage of bad news in the year just gone—including a series of banking bloodbaths as well as some being implicated in the Libor fixing scandal—2013 has begun on a more positive note for some of the world’s biggest lenders.

The new year kicked off with the announcement on January 6 that the Basel Committee on Banking Supervision was to relax incoming regulatory bank liquidity rules, known as Basel III, by broadening the definition of liquid assets and extending the deadline in which banks have to meet these new rules.

This has seen shares in banks, especially in Europe, rally in early-year trading as the Basel change has given banks some extra breathing space in meeting the new 2015 start date.

And this is on top of a somewhat surprisingly stellar performance by banks in 2012, in which bank shares generally gained around 25%—outperforming equities by 10% or so. Although it has to be noted that these gains have come from a low base, after bank shares had been decimated following the onset of the global financial crisis.

This new-found positivity is a welcome relief for banks, who are having to contend with a mountain of other regulation that is intended to increase transparency and reduce risk following the financial crisis, but is set to ramp up costs still further. In response, many banks, such as UBS and Citigroup, have, in recent months, announced plans to cull vast swathes of their workforce.

“The [Basel III] revision is a welcome late Christmas present and we are delighted that a decision was finally able to be reached,” said Simon Hills, executive director, prudential capital, risk and regulatory relationships at the British Bankers’ Association, a trade body, in a recent blog.

“It will reduce the uncertainty that banks and their investors face—hence Sunday’s announcement has been reflected positively in banks’ share prices.”

Hills added: “The BBA has been raising its concerns about the precise make-up of the [liquidity] buffer and its initial focus on sovereign bonds—such as gilts, U.S. treasuries or bunds—and the effect on banks’ ability to finance the wider economy that this would have.

“But the weekend’s changes broaden the range of eligible assets to include good quality retail mortgage backed securities [RMBSs], which can now make up 15% of the total buffer requirement.

“This is good in a couple of ways. Firstly, it means the aggregate return on banks’ liquidity portfolios will be a bit higher but secondly and more importantly it should re-invigorate the securitization market which has been moribund since the beginning of the global financial crisis as all RMBSs were tarred with the same sub-prime mortgage brush.

“As a result banks will be better able to manage their balance sheets, to make space for lending to businesses.”

However, others are not so sure that it will become that much easier for banks to operate in this new risk-averse landscape.

“Softening the Basel liquidity rules caused some bank shares to rally, but economists are less excitable than equity markets,” said Paul Donovan, senior economist at Swiss bank UBS.

“Economically speaking, we need to see a greater willingness for banks to intermediate in the economy, especially in the euro area.”

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