Basel under gun to divulge bank rule details earlier

LONDON Fri Jul 9, 2010 12:10pm BST

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LONDON (Reuters) - Global regulators gathering next week to finalise tough new bank capital rules face increased pressure to be more open after the market's positive response to greater transparency over European bank stress tests.

The Basel Committee of central bankers and supervisors meets on July 14-15 to finesse its Basel III reform.

The committee has not detailed how much extra capital banks will have to hold, prolonging uncertainty for markets until November, when the Group of 20 leading countries are due to endorse the details ahead of publication.

The G20 said last month that capital will have to be significantly higher and its quality significantly improved so that taxpayers won't need to shore up banks in the next crisis.

The world leaders were seeking to give an early steer on the new rules and help put markets on a calmer footing, but investors remain on edge and sources from some governments feel that more explicit guidance is needed.

Analysts have estimated banks will need billions of dollars in extra capital at a time when investors are risk averse.

"This degree of uncertainty is not helping the market," said Simon Hills, a director at the British Bankers' Association.

NO SKELETONS

There is pressure on the Basel Committee to divulge more of its plans before November.

Proponents says this, along with the EU's decision to divulge the methodology as well as the outcome of European bank stress tests, would help restore market confidence.

"To our understanding, a revised set of proposals is scheduled to be released at the Basel Committee meeting on July 15," FBR Capital Markets said this week.

Forging a consensus in a committee representing nearly 30 countries is proving to be far from easy.

"We need to and want to release a paper but it is difficult to put together the members' opinion," an official close to the bank capital negotiations said on condition of anonymity.

"We don't think the G20 statement is enough (for markets). If we can't frame the skeleton structure of Basel III or at least the core ideas, it will become impossible to clarify the whole picture (to the public) in November," the official added.

The G20 has already given banks more time to implement the changes than the original end of 2012 deadline. Separate rules to beef up capital held against bank trading books have also been delayed a year until the end of 2011.

"The G20 statement was strong on calibration, definition and transition so that market uncertainty has been if not fully resolved, significantly reduced," a second person familiar with the Basel negotiations said.

Many banks are already holding far higher levels of capital than they did before the crisis.

And a longer phase in will give banks time to beef up capital from retained earnings rather than having to tap jittery markets.

WATERED DOWN

Analysts have mixed views over Basel's impact. FBR expects that companies will not be required to raise additional capital but rather to retain more capital.

"That is, less capital management discretion over dividends and stock buybacks for banks," it said.

Morgan Stanley bank said this week clarity on Basel would trigger a wave of dividend hikes and buybacks at large U.S. banks next year, using capital now being hoarded due to uncertainty over how high the new capital requirements will be.

Parts of Basel will also be reworked due to pressure not just from banks but also from G20 members in Asia and Europe.

Japan, for example wants to dilute Basel's proposal to end the inclusion of deferred taxes in capital.

European countries are pushing back against other elements that seek to toughen what qualifies as core capital. Many expect the proposal to exclude capital at minority-held subsidiaries from core capital to be reworked.

Basel could decide to take more time with proposals that force banks to build up extra buffers of capital in good times for tapping when markets turn rocky.

"On counter cyclical capital, they will take a bit longer to think about the implications of banks having to build up buffers. That is something they will save for later," BBA's Hills said.

Bankers also expect proposals to toughen up longer term liquidity rules to be looked at again.

"We expect a watered down version of Basel III will be finalised this fall ahead of the G20 meeting in November, supporting our call for capital management by banks in 2011," Morgan Stanley analysts said.

(Additional reporting by Boris Groendahl in Vienna and Noriyuki Hirata in Tokyo; Editing by Ruth Pitchford)

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