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Basel III – Well-engineered regulation?

The ink was hardly dry on the main features of the Basel III Accord agreed by the heads of state of the 20 most important countries in November 2010 at the Convention & Exhibition Center in Seoul, Korea, when people began crunching the numbers. The CEO of a leading universal bank is quoted as claiming that the new rules would halve the return on equity to a level lower than the cost of capital.

Another Managing Director noted that the equity capital required as cover for credit was being increased fourfold, making an increase in the cost and a reduction in the scope of lending to private and commercial customers inevitable. That, the International Institute of Finance forecasts, will reduce international growth by 3%, and because banks around the world need additional capital to meet the new requirements, analysts are busy transferring the present capital ratios to a "what would apply if Basel III were already in force" scenario as a yardstick of capital requirements and dividend potential in the years ahead.

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