The capital requirements for banks have to be reconsidered in 2009 as the financial services industry recovers from the disasters of 2008. The credit crunch started the drain on capital within markets that led to a massive government injection of cash to try and free up credit lines. As we go into 2009 it is still unknown if the $Billions already thrown into the mix will be enough to see the financial markets and the global economies kick start out of recession.
This government remedy is a slow process and will take most of 2009 before we begin to feel the real effects, although indicators showing it is working should begin to manifest earlier in 2009. This should help rekindle confidence in the markets and draw out of the bunkers, the investors. On the other hand if the 2009 picture continues to show a stagnant market, further tax payer’s cash will be required.
But how does all this impact the banks in the medium and long term?
The banks capital requirements have been put under extreme pressure and it’s highly probable that the regulators will now review the capital adequacy requirements. They will not be reduced!
It may be that the regulators now need to refine their capital requirements depending on the size, type of business and client list. It is obvious that the lines of credit have been blurred between banks, primarily due to the hidden exposures into OTC and other risk based products and this has hindered the regulators from getting a clear picture.
If banks had to gain approval from regulators and government agencies before they embarked on their business, their processes could be audited and new capital requirements assigned. Banks that did not have the capital to support new business ventures could then be deterred unless they funded adequately.
The question of capital has to be answered now in international terms. It’s not enough for a bank to come within the capital requirements domestically if this is blown apart internationally. There has to be a new consolidation of the exposures undertaken by bank, in all international markets, with information collated by the home regulator of the holding company but shared with all other international regulators.
In this scenario pressure points within a banks global business can be rectified quickly and quietly without drawing the attention of the market or incurring the potential damage to the bank of reputational risk.
In 2008 we saw the demise of the existing banking system and in 2009 we should see the birth of the new. It’s vitally important that all the worlds banks are capitalised sufficiently to carry out their business and that this is reported to all regulators where the bank undertakes business. This is not as radical as it sounds, very easy to implement and a vitally important cog in the wheel to recovery.
* Gary Wright, is an industry analyst and ceo of B.I.S.S. Research, a research firm and benchmarking service for the financial industry.