The Basel Committee met on Sunday in order to decide that banks must have common equity equal to at least 4.5% of assets, up from 2%, and the minimum for Tier 1 capital has been raised to 6%. A 2.5% capital conservation buffer will also be necessary, and although the banks must comply with the common equity ratio by 2015, the capital conservation buffer deadline is 2019.
Basel III seems eminently sensible both on the surface and within the pages, most notably the additional countercyclical capital buffer of 2.5% of capital needed by banks during bull markets. Not only could the amount of Tier 1 capital potentially reach 10.5% needed by banks in good times, the BIS has stated that more capital stipulations are on their way.
However, if you look at modern market crises:
2007 Sub-prime market crash
2000 dot.com crash
1998 Long Term Capital Management + Russia
1992 Black Wednesday
1987 Black Monday
1985 Savings and Loan Scandal
1973 Stock Market Crash
You have an average of 5.6 years between each market crisis. Over the last 20 years, the longest period between major market shocks is 7 years. Come 2019, either Basel III will be seen as some arcane regulation as another bull market rages (much as Basel II was in 2006 and early 2007, during the height of the last bull market), or we will be in the midst of a new crisis, and banks will be using Basel III as a stick to hit regulators with, every time the latter implores banks to up lending rates.
Regulators may be worried that forcing banks to submit to capital requirements too soon will trigger a second recession, but as many banks are not lending today, many of the U.S. banks already meet the new requirements, and many have large cash reserves banks are sitting on over $1 trillion according to Federal Reserve data raising capital reserve requirements earlier may not trigger anything worse than more vitriol and lobbying from the banks themselves – although seeing as bank stocks are up today, even that may be watered down. Sometimes the butcher’s knife is best, but then again, to paraphrase every football fan, whod be a regulator?