Basel III Rules Could Put the Screws to Top Banks

| About: Deutsche Bank (DB)

Regulators and officials from 27 countries will meet in Basel, Switzerland to create a new series of rules they hope will avert future bank meltdowns. The basic issue is how much Tier 1 capital (cash and assets) banks need to have to provide a cushion against bad loans. The first step will be re-defining "cash and assets."

At the last Basel conference, Basel II, banks were allowed to count tax credits and certain mortgage-backed assets as Tier 1 capital. From a bookkeeping perspective, a tax credit could be considered an asset, as it would improve earnings. But no one will accept a tax credit as payment for anything.

After re-defining Tier 1 capital, the Basel Committee on Banking Supervision will decide how much Tier 1 capital banks must have. Right now, banks are required to have a core capital cushion (cash) of 2% of "risk weighted assets." Basel III might raise that requirement to 6.5% or 7%.

Obviously, that's a big change in Tier 1 capital requirements. European banks will have to raise money. Deutsche Bank (NYSE:DB) is already planning to sell $11 billion in stock based on recommendations from the recent "stress tests" conducted on European banks. Since U.S. banks have already been required to raise capital after the U.S. Treasury "stress tests", they may not have to raise more capital.

But it's likely that U.S. banks will continue to be reluctant to lend once stricter regulations are in place. That may mean that small businesses will increasingly rely on private equity firms for funding.

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