Capital ratios control permissible leverage which initially appear to control bank returns on equity, but longer term spreads adjust and the roe gravitates to a bank’s cost of capital.
And since higher leverage increases risk to investors, the cost of capital eventually adjusts to the capital ratios, so over time- in the long run when we’re all dead to quote Keynes- it all comes down to about the same thing.
With markets discounting the near term a lot more than the long term it makes sense lower capital ratios will help bank equities.
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> FYI – FSA just stated no agreement has been reached yet.
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*JAPAN’S FSA SAYS NO AGREEMENT TO EXTEND RULE IMPLEMENTATION
*JAPAN’S FSA SAYS INTERNATIONAL TALKS ON CAPITAL RULES ONGOING
*JAPAN BANK REGULATOR SAYS `NO TRUTH’ CAPITAL AGREEMENT REACHED
By Shingo Kawamoto
Dec. 16 (Bloomberg) — Japan’s Financial Services Agency
says no agreement has been reached on delaying new rules on
capital adequacy for banks. Motoyuki Yufu, a spokesman for the
regulator, spoke after the Nikkei newspaper reported
international banking authorities agreed to start introducing
new capital adequacy rules from 2012, giving lenders a
transition period of 10 to 20 years to implement the
regulations.
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> Based on article below this transition period could potentially apply to
> all banks and not just Japanese banks
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Banks Given 10 Years To Meet Tougher Capital Rules
TOKYO (Nikkei)- Global banking regulators have agreed to effectively delay the enforcement of new capital adequacy rules for large banks, opting to create a transition period of at least 10 years, The Nikkei learned Tuesday. The Basel Committee on Banking Supervision, made up of the banking authorities of major countries, has been discussing introducing stricter capital requirements since September 2008 in an effort to prevent a recurrence of the global financial crisis.
The proposed changes include raising the 8% minimum capital ratio banks are currently required to maintain and focusing on a narrower definition of core capital. The committee will stick to its plan to gradually introduce the new rules starting in 2012, but will establish a transition period of 10-20 years. This means that the rules will not be fully implemented until at least the early 2020s.
Banking authorities have apparently determined that a rush to adopt stricter requirements might deter lending by major banks and hurt the chances of a recovery in the global economy. “The Basel Committee has turned to a more cautious approach,” says a financial regulatory official in Japan. The committee will also consider allowing banking regulators in each country or region to decide when to fully adopt the new requirements. The slow phasing in of new capital rules will come as good news to Japanese banks, which had faced the prospect of being forced to bolster their capital through the issuance of common shares.
The Basel Committee plans to compile an outline of its proposals before the end of this year and roll out a concrete plan sometime next year.
(The Nikkei Dec. 16 morning edition)
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