Delay on Basel Capital Requirements Gives Banks Breathing Room
Kyle is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It has widely been reported that regulators and central bankers in the EU and UK are giving global banks more time to meet new Basel Accord capital requirements and other rules designed to prevent future financial crises from getting out of hand.
The delay is said to be an effort to avoid damaging the economic recovery that is coming any day now. Mervyn A. King, governor of the Bank of England who is spearheading the group recently said that this does not mean regulators intend to go easier on lenders.
The Basel capital rules are meant to ensure banks have sufficient cash on hand to survive the market chaos that followed the collapse of Lehman Brothers in 2008. The committee also eased up on the definition of liquid assets.
In sum, the rules will not take full effect on Jan. 1, 2015, but rather will be “phased in” more gradually and not take full effect until Jan. 1, 2019. The so-called liquidity coverage ratio also broadens the definition of liquid assets as those that cannot be already pledged as collateral and that are under the control of a bank’s central treasury including mortgage backed securities.
The decision may relieve some pressure on US firms like Bank of America (BAC), JP Morgan Chase (JPM), and Citibank (C) that were concerned the previously contemplated guidelines would impede lending and hurt economic growth. In fact, JP Morgan Chase CEO Jamie Dimon labeled these rules as “anti-American.”
So, the credit markets might see some improvement which could boost lending in the housing market as well as provide small businesses with access to credit. In other words, the so-called “fundamentals” for the banking sector appear sound.
But then, back in 2008, GOP Presidential candidate John McCain boldly announced the fundamentals of the economy are sound, and moments later Lehman filed for bankruptcy and the economic tsunami rolled in. And his brilliant remarks effectively ended his campaign.
While investment decisions are normally a consideration of the fundamentals, investors also must consider “intangibles.” And in an era of enhanced regulatory scrutiny, ongoing probes by federal authorities are the X factor.
In this regard, the ongoing global investigation into the Libor fixing scandal is a big threat to the banking sector.
Based on my experience in regulatory affairs and after writing about these matters for a number of years, this situation is the most perilous and heinous scandal to emerge in the aftermath of the economic crisis of 2008. In short, if more huge settlements and criminal charges are brought like the pending action against UBS (UBS), stock prices could suffer from the fall out.
In fact, as more revelations surface and other banks are nailed, this is probably a good time to take some money off the banking table. And for investors willing to place a bet, it’s a pretty good one that other grand settlements and criminal charges make this a good time to go short.
In the end, any economic recovery is still off in the distance and a number of hurdles and obstacles in the financial sector are clearly visible on the horizon. The bottom line: Caveat Emptor. And always consult with a bona fide financial advisor before making any investment decisions.
Kyle Colona is a freelancewriter from the greater New York area. He has extensive experience in regulatory affairs in the financial sector and his writings have appeared in an array of online and print publications. Please note:Mr. Colona is not invested in individual stocks and he is not a financial advisor nor is he affiliated with any advsiort firm.