Next month in Seoul the G20 leaders will formally receive a package of reforms designed to secure the future of the world’s financial system. Banking reforms are what the world’s politicians demanded after the financial meltdown of 2007 and that is what they now have. Unsurprisingly, the package – put together by regulators led by the Basel Committee on Banking Supervision – is all about prudence in an attempt to bring a no- surprises culture into play.The reforms increase the minimum common equity requirement for banks from 2% to 4.5%. In addition the banks will be required to hold a capital conservation buffer of 2.5% to withstand future periods of stress, bringing the total common equity requirement to 7%.
Central bankers are jubilant. European Central Bank president Jean- Claude Trichet said: “The contribution to long-term financial stability and growth will be substantial. The transition arrangements will enable banks to meet the new standards while supporting the economic recovery.” The deal was announced just before the second anniversary of the collapse of Lehman Brothers – a reminder that real stability depends on trust between bankers and regulators. While regulators have much work to do to finesse the detail – calibration, transition-feedback mechanisms and clarity around the operation of capital buffers – of more immediate concern to treasurers is how banks will model their capital and liquidity ratios in this brave new world.
While these are early days it seems that for many banks the liquidity challenge will be even bigger than concerns over capital. The politicians and regulators are desperate to avoid a slide into double-dip recession and stress that the transition to a stronger financial regime will be carefully managed so that prudence and growth can walk hand in hand into a brighter future.
But that pairing is by no means guaranteed a happy outcome. If private companies are meant to be kick-starting growth, they’ll need funding from somewhere. The question for treasurers is simple: what does all this mean when they go knocking on their banks’ doors asking for that finance? The answer from Britain’s bankers is clear, even if it is not cheerful. Angela Knight, chief executive of the British Bankers’ Association had this to say about the central bankers’ deal: “The liquidity requirements are significant, as these feed through to the price and the availability of lending. A bank is like any other business – if its fixed operating costs go up, then so does the price of its product. All the changes are good from a stability perspective but add billions to the fixed operating cost of a bank. The consequence is that inevitably the cost of credit – the price the borrower pays for money – will rise. The cheap money era is over.”
You could argue that treasurers have known that for the best part of three years, and there is also a certain element of “Well, she would say that, wouldn’t she?” But treasurers must keep the dialogue going with bankers over the coming months, especially as we head into a crunch time for refinancing. Treasurers also need to ensure the message is understood internally: finance risk remains the number one priority.
PETER WILLIAMS
EDITOR
