Basel Committee Clarifies, Contradicts Japan

Japanese media had intimated that there would be a long--decade or more--transition period to new capital requirement rules. This apparently was a factor behind the surge in Japanese banks shares yesterday, before consolidating today, for example. However, the BIS' Basle Committee on Banking Supervision indicated earlier today that the new capital requirement rules will be phased in as financial conditions improve, with a target date of the end of 2012. Of course, this would presume the the end of the Mayan calendar and other astronomical events do not end civilization at the winter solstice that year.

Essentially, it appears that a global minimum liquidity standard should be introduced and new capital ratios that will be consistent with stricter supervision and leverage. The committee said it will analyze the likely impact of the new standards in H1 2010 and the details of the new requirements would be issued at the end of next year. One element that has not been worked out yet is whether financial institutions that are deemed too big to fail will have extra capital requirements or other supervisory measures.

There is a general agreement that banks should have larger capital buffers and that capital should be of a better quality. The Basel Committee wants banks' core capital to exclude equity or other instruments that may require payments to a third party.

The impact of the rules are likely to hit some harder than others. Given the Japanese push for a long transition period and the relatively higher equity holdings of Japanese banks, would seem to suggest the potential of some vulnerabilities. Although Japanese banks did not appear to have much significant exposure to US derivatives, eastern European debt or many of the other financial toxins, the Topix bank share index is nearly 60% below last year's peak and more than 75% below the 2006. The Topix itself is more than 40% off last year's high, but note that this month marks the 20th anniversary of the peak in the Japanese stock market. It is about 80% below that peak.