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Is Basel faulty?

Mortgage experts are divided over how the new capital and liquidity requirements decided by the Basel Committee will affect mortgage lending.

The committee has developed the rules with the aim of ensuring banks have sufficient capital to weather any downturns without taxpayer support.

Banks will be required to hold a minimum core tier one capital ratio of 7 per cent, which includes a “conservation buffer” of 2.5 per cent. This has increased from a minimum core tier one capital ratio of 2 per cent.

Banks must not allow the level of core tier one capital they hold to fall below 7 per cent although exceptions will be granted in times of tough economic circumstances.

The measures will be ratified by heads of governments at the G20 summit in November and will be phased in between January 2013 and January 2019.

The British Bankers’ Association is concerned the rules will increase the price of lending.

BBA director Irving Henry says: “The new rules are good from a stability perspective but there will be added costs for the banks. Banks are the same as any other business, in that additional fixed overhead costs have to be factored in somewhere.

“Tying up additional capital and the new liquidity requirements will squeeze the money that banks have to lend. A diminished supply will have the effect of pushing prices up.”

But the Council of Mortgage Lenders does not think the rules will affect the volume of mortgage lending in the short term, as UK banks already hold capital in excess of that stipulated under the new requirements.

A CML spokesman says: “Most of the major UK banks already have capital holdings in excess of the new limits. As a result, we would not expect there to be any significant impact on lending, certainly in the short term.”

Cicero Consulting director Iain Anderson says lenders and trade bodies are likely to lobby the European Parliament to ensure the measures do not stifle lending. He says: “There is still a question as to whether the calibration is set in the right place, particularly on residential lending and the SME sector. There is going to be one almighty intense lobby of European parliamentarians in the coming year from lenders and trade bodies to get this absolutely right so it does not restrict the availability of credit.

“The big ask is to try and join all of this up with what is happening in the States and Japan because if we do not, we will end up with a skewed picture in terms of lending and mortgage lenders’ operational capabilities in different territories.”

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. Quality headline.

  2. This definitely has to be one of the most brilliant headlines.

    Well done!

  3. Flowery Twats

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