Basel III capital rules will cut into global bank profits, as lower borrowing costs are pushing institutions into the bond market, reports Bloomberg.
It adds returns will likely drop by 5%-to-7% from levels seen prior to the credit crisis. Read more about how banks will cope.
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In other banking news, European Union finance ministers are now making a fresh attempt to set up rules on who will pay for bank bailouts. Their aim is to stop taxpayers from footing the bills.
The establishment of these rules would be an important step forward in creating Europe’s new banking union, which would help restore financial and economic stability to the recession-hit bloc.
The EU’s 27 finance ministers were set to gather for what is likely to be a lengthy emergency meeting in Brussels today after failing to reach an agreement in 19 hours of talks last week.
EU Commissioner Michel Barnier, who is in charge of banking reform at the bloc’s executive arm, recently told reporters in Brussels that “an agreement is now within reach.” He acknowledged, however, that there are arduous negotiations ahead.
Read: Will a banking union save the Eurozone?
The ministers’ last-minute talks came only a day before a summit of the EU’s 27 heads of state and government that is expected to take stock of the progress of the bloc’s financial and economic policies. A year ago, they pledged to tackle the eurozone’s financial crisis by introducing the banking union.
The rules under discussion today seek to determine the order in which investors and creditors would have to pay to bail out a bank. A key stumbling block is who to hit hardest: Should it just be banks’ creditors and shareholders, or should small companies and ordinary savers holding uninsured deposits worth more than 100,000 Euros also be included?
The new European rules would also establish a minimum level of funds, be it capital, bonds, or deposits, that banks must have on their books to ensure that there’s always enough privately held assets on hand. This should shield taxpayers from the burden of propping up the bank. That level, according to diplomats, will likely be set at 8% of a bank’s total balance sheet.
Two specific issues are causing a rift between officials. These are:
- Whether or not the rules should apply for the 17 EU countries sharing the Euro currency, as well as for the ten members like Britain who have their own currency
- Second, officials are unsure how much discretion should be granted to countries when it comes to restructuring or shutting down banks
Also, some nations don’t want to be bound by rigid European rules, while others warned too much flexibility would create new imbalances between weaker and stronger economies. A lack of common rules is needed to boost certainty for investors and support trust in the financial system.
In the future, Eurozone nations will be able to use the bloc’s 500 billion euro permanent bailout fund as a last resort to shore up their ailing banks. The non-Euro countries, however, won’t have access to the funds and must therefore ask for rules that give them more flexibility to design their own responses to bank failures.
“We don’t want money from other EU countries, but we do want to have the right to use our taxpayers’ money for our own banks,” says Finance Minister Anders Borg of Sweden. “Everything else would endanger the long-term stability of our banking sector.”
The talks also include discussion of centralized oversight of big banks anchored at the European Central Bank, which is due to be operational next year. But the discussion on the third section, a jointly guaranteed deposit insurance, is only in its early stages.