The Counter-reaction to the Financial Crisis.
We all remember the consequences of the financial crisis on the international banking system that started in 2007. Obviously, it was impossible to ignore this kind of situation, and therefore, it was followed by the corresponding reaction.
On the September 12, The Basel Committee on Banking Supervision approved the global reform of the global banking sector. It was called "Basel-3, and its developers hope it will increase the financial stability of the world's banking (and the financial in general) systems, primarily by increasing banking liquidity reserves and by improving their quality.
The application of new rules on demand to the structure of assets and capital of the banks will begin in January 2013 and be fully completed by January 2015, to the structure of reserves by the 1 January 2019. The key changes are that the minimum common equity requirement will increase from today's 2% to 4.5% and in addition there will be a 2.5% conservation buffer bringing the total to 7%. Banks will be allowed to use the buffer during the emergency periods but the more it is used the greater the constraints will be on earnings distributions.
In general, the measures are pretty serious, especially given the fact that the financial system in general and banking in particular are in a fairly complicated situation. On the other hand, there is plenty of money available in the world today, and why would investors not invest in the common-equity of banks - the profit is something that is still almost impossible to get. But the main question is: whether this will give any positive system effect?
According to financial data and sources, the current scale of the financial sector has become out-of-limit: it must inevitably start to decline, and quite significantly (the relative part of the financial sector in the economy has grown significantly over the past 30 years). At the same time, the actual sector itself will start shrinking - and this decline will be significant too. This means that the financial sector will be reduced much more than the economy as a whole, that is at least by 3 and sometimes by 5-6 times. This is a so-called structural crisis: different sectors vary in different scales.
This means that the overwhelming number of banks will not only be unable to fulfil the new Basel requirements, they will have to learn how to survive. In other words, by the time when these requirements are supposed to take place in full power in the Committee's view, the modern banking system will simply disappear. And the main question that arises here: do Basel experts themselves realise that? I do not particularly have the exact answer to this question, but I suppose they don’t or they simply don’t show all their cards to the public.
K.S.
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