The decision late last month to delay the introduction of new
capital requirements for large banks may keep bank share prices
under a cloud of uncertainty for 2013. The new rules would
require banks to raise new equity capital, shrink their balance
sheets or some combination of the two.
The new rules, known as Basel III, were formulated with the
idea of making large banks safer following the collapse of Lehman
Brothers in 2008. Basel III requires large, too-big-to fail banks
all over the world to hold enough capital to find themselves for
30 days in the event of another financial crisis.
When Lehman Brothers failed in September 2008, banks stopped
lending to each other in the interbank market. Because Lehman had
issued a lot of debt, which was widely held by banks, no one
could determine how risky a loan to any particular institution
might be. Liquidity and credit dried up immediately with
devastating consequences that we are still living with today.
The new rules were supposed to go into effect on January 1,
2013. However, in late November, U.S. banking authorities
unilaterally decided to delay indefinitely the implementation of
the new rules. According to
, "The 19 largest U.S. banks subject to the Fed's stress testing
program represented over 90 percent of the assets of
internationally active U.S. banks, and three-quarters of the
assets of all U.S. banks…"
Reuters continued, "The rules, which triple the amount of
basic capital banks need to hold, are meant to be phased in over
a six-year period starting in January 2013."
Although the U.S. says it is still committed to implementing
Basel III, there are disagreements over how to implement the
rules and how to unify the rules among every country's banking
Following the U.S. decision to postpone Basel III, European
banks petitioned the EU Internal Market Commissioner to allow
European banks to delay the implementation of Basel III as well.
"We are now very troubled over the possible repercussions that
the most recent statement from the US Authorities may have for
the international competitiveness of Europe's banks," the
European Banking Federation wrote, asking the EU to delay the new
rules until January 1, 2014.
Reuters wrote, "It said EU banks were facing sweeping
regulatory changes including new capital requirements and
liquidity buffers, and the creation of a EU supervisory
authority. 'All the while, our U.S. competitors will not have
matching obligations imposed on them in parallel, or in a
The European Banking Federation today asked the EU for a
"…review of tougher financial regulations on the eve of their
adoption as the region sinks into a recession, dimming prospects
of raising $621 billion in capital needed to meet the rules,"
While, on the surface, a delay in implementing the new rules
seems positive for the banks, it does introduce a new level of
uncertainty for 2013. For example, the delay in implementing the
new rules may not necessarily delay the deadline for meeting the
new capital requirements. The might mean that banks will have
only five years to adjust their balance sheets instead of six
Bank may also remain reluctant to lend to each other for as
long as there is uncertainty over how much capital they will need
to support their assets in 2013 and beyond. While this is
particularly true of European banks, this uncertainty could well
spill over into the U.S. market. The sooner there is clarity over
how much capital the banks needs, the better.
Investors should be concerned over the timing of introducing
the new capital requirements. If banks will be forced to raise
significant amounts of new equity during a recession or during a
market downturn, it could prove to be a costly exercise.
On the other hand, if regulators continue to postpone the
implementation of the new capital requirements, it calls into
question their commitment to the rules and to the idea of
international coordination of bank capital.
Generally speaking, uncertainty is bad for share prices and
banks are no exception. Investors may want to consider a short
position in the SPDR S&P Bank ETF (NYSE:
), particularly if KBE breaks below major support around the
$22.50 to $22.75 area. If banks turn weaker, buying the Pro
Shares Ultra Short Financials (NYSE:
) might also make sense
(c) 2012 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.