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The European Union is pushing back the implementation of the global banking reforms, which were supposed to take place on January 1st. It has been delayed at least six months, with talks that it may get pushed back even further. Basel III is the name of the reform plan, and it is a global response to the financial crisis from 2007-2009. Basel III is a critical step to protect large institutions against future financial shocks. Until the European Union can agree on the plan, the delay holds a risk of throwing off the recovery process. However, if the regulations in Basel III are too harsh, it could risk cutting economic growth and an increase in unemployment.
The bank capital proposal that comes with the plan is that banks shall hold the strictest form of common-equity capital at 7 percent of their risk-based assets, with the largest financial institutions holding an additional capital buffer of up to two and a half percent. This percentage is up from two percent that it currently stands at. There are worries that since the United States regulators delayed the plan for its economy, it might put the European Banks at a disadvantage internationally.
Basel III is estimated to require about $566 billion in common equity in order to accommodate the new rules. This would involve major cuts in these banks’ median return on equity, taking them from eleven percent to less than nine percent. Basel III is predicted balance the decreased return on equity with stronger capitalization and lower risk premiums, appealing to investors. If all goes according to plan, this deal will strengthen global capital standards and allow for long term financial stability and substantial growth to follow. If Basel III is even the solution to the European crisis, how long will the road to economic recovery be?
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