Basel reform may lead to higher bank lending rates

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Basel reform may lead to higher bank lending
rates
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“Basel reform may lead to higher bank lending rates”
Named after the beautiful Swiss Town where it has its secretariat at the
Bank for International Settlements, the Basel Committee on Banking Supervision
was formed as an effort to raise the standards of banking supervision worldwide
(Settlements B. f., 2011). It achieves so, via a mutual reciprocity of information
on supervisory issues and techniques. After Basel I and II, the latest update to the
Basel Accords (1988), Basel III is to be implemented starting from 1st January,
2013 (Settlements, 2010) and would take effect gradually over the next eight
years. Its aim is to improve upon the banking sector’s shock absorbing & risk
managing ability and bolster its transparency (Settlements, 2011)
Basel III concentrates on achieving financial system cohesion, through its
both micro and macro, institution-specific reforms. This is an improvement on
Basel II, a proven failure in insuring banks with enough capital to withstand a
juggernaut of a credit crunch, during global economic crisis. The Basel III micro
reforms would include raising quality of capital, improved coverage of risk,
requirement of higher level of capital and introduction of a global liquidity
standard. Introduction of a leverage ratio, measures to raise capital levels and an
enhanced loss-bearing capacity in the banks are its macro counterparts.
(Settlements, 2010)
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These reforms, centrally, have two pivotal demands 1) the banks need to
have more liquid assets (banks need to hold core Tier 1 capital of 4.5% + 2.5%
buffer & there would be restrictions on dividends and bonus payout on any bank
which operates below 7% ratio) (Griffiths, 2010) (the Bank of International
Settlements have recently announced that there would have been a $762.85
Billion shortage, had Basel III rules come through in 2009 (Rogow, 2010)), like
Government debt. The liquid assets that can be used in repo transactions, have
been very assertively and specifically been defined by the APRA (Australian
Prudential Regulation Authority). The length of the time period required to
adjudicate whether a bank can withstand a particular crisis (liquid coverage ratio),
has also been stretched. 2) Based on assessment of liquidity of assets and
contingent liabilities, there is a requirement of a minimum proportion of longterm stable funding over one single year horizon. (Davis, 2010). Under the new
rules, the Group 1 institutions (more than 3 Billion Euros in capital), require in
additional common equity, 177 Billion Euros, which goes up to 577 Billion
Euros, in order to maintain the 7% ratio (Griffiths, 2010).
The Australian Government, Reserve Bank of Australia (RBA), Australian
Prudential Regulation Authority (APRA) and the Basel Committee on Banking
Supervision announced the regulatory reforms on 12th December, 2010, which
would bear immense importance to the Australian banks (Kuessner, 2010). One of
the highlights has been the requirement to hold back an extensive amount of
liquid assets by the banks. The shortage of Government bonds (APRA laid a 
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serious stress on Government bonds and non-bank commercial papers as major
liquid assets) has posed a serious concern in the country. The Government of
Australia has a debt of only A$ 176 Billion while the four big banks have assets
and deposits of A$ 530 and A$300 or more, each (Reuters, 2010). Some other
forms of debts have also been pointed out as “level two” category liquid assets by
the committee, which would possibly bring the contemplation of bank bonds or
other debt instruments, but investors are pretty much sceptic about it being
enough to meet the mandate (Rogow,2010).
In the wake of the official announcement of the new Basel III ‘highliquidity’ rules, the Reserve Bank of Australia and the Australian Prudential
Regulations Authority have announced that a bank or an authorized deposit taking
institute, which would be adequate in size to bridge the gap between any banks
high-quality liquid assets holding and its liquidity cover ratio requirement, can
constitute a secured liquidity facility with the Reserve Bank of Australia (Rogow,
2010). All the assets acceptable as collateral for the secured-liquidity facility
should be eligible for repurchase transaction with the Reserve Bank of Australia
under normal market operations (Reuters, 2010).
However, usage of this secured liquidity facility would come at a certain
price to the banking institutions, adding up to their rising cost of funds. The top
four banks, i.e., National Australia Bank, Commonwealth Bank of Australia,
Westpac Banking Corp. and ANZ would have to pay an accumulated fee of
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$593.4 Billion to $1.19Billion, according to Credit Suisse estimates. Some experts
even say that for many of the banks the mandatory liquidity woul 


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