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06 May 2021
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Addressing the ECO Section meeting at the European Economic and Social Committee in Brussels last Tuesday, Maltese enterprise owners representative at EESC Vince Farrugia criticised the new Basel III regulations imposed by the Bank of International settlements third attempt in 20 years to force Banks to raise their capital ratios.
He was speaking soon after Mr Marc Hollanders, Special Adviser on Financial Infrastructure, Policy, Coordination and Administration, Monetary and Economic Department, and Mr Karl Cordewener, Deputy Secretary-General, Basel Committee on Banking Supervision from BIS explained what action the international regulator of financial institutions was taken to ensure that the world will not face another financial crisis as happened after September 2008.
Vince Farrugia stated that these rules aim to address one of the biggest threats to the global economy: the tendency of financial organisations to go bankrupt during bad times. Among other reforms, the rules require banks to finance their activities with more equity, or capital, as opposed to debts.
The equity helps guarantee that the bank's own shareholders will absorb any losses, instead of turning to taxpayers for bailouts. For the bigger banks the new rules amount to something between 3% and 5 % of assets this. Vince Farrugia said this is similar to putting €3,000 to €5,000 down on a 100,000 apartment. Somehow according to calculations based on Basel III this should in practice represent 10% of risk weighted assets.
Vince Farrugia pointed out that the best research available from a group of researchers led by former Morgan Stanley economist David Miles, even extremely high capital ratios – as high as 50% -would actually be good for the economy because the benefits of reducing the frequency of financial disasters far outweighs any cost. These experts agree that optimal capital would probably be about 20% of risk-weighted assets, equivalent to tangible equity of 7% to 10%. That is double the level in Basel III.
Vince Farrugia stated that furthermore the Basel rules create perverse incentives. Instead of defining a bank's equity simply as a share of its total assets, Basel assigns each asset a weight that is supposed to correspond to a risk. Government bonds, for example, have a zero weight, as if government bonds had no risk at all. This makes these bonds very attractive and helped turn Europe's debt problems into a global crisis by encouraging banks to invest heavily in high-yielding debt issued by countries such as Greece.
"These rules simply do not go far enough" stressed Vince Farrugia and as representative of enterprise he wanted to raise the voice of most European enterprise owners who do not feel secure enough under the Basel rules and are therefore insisting with EU Member states to legislate in favour of higher more stringent requirements so that banks have much stronger loss-absorbing capacity consisting of equity and debt that converts into equity in times of stress of as much as 20%
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