New compliance regulations for European Banks bring Basel III back into perspective once again for 2012. It is well known that there are regulations that must be followed to ensure risk management. It helps to manage bank leverage, liquidity, stress testing and capital adequacy.
According to the Organization for Economic Co-operation and Development (OECD) compliance and implementation of Basel III was mandatory in banks. The organization estimates that the GDP growth will be reduced by at least 0.05% to 0.15%. This meant that henceforth bank managers will be obliged to be informed about the liquidity condition in the market. There will be need to focus on major assets, so as to strengthen accountability. This will subsequently mitigate major losses through best practices.
Compliance with Basel III will impact European banks in a number of aspects.
- There will be impacts on European banks
- There will be responses by the banks
- There will be challenges to ensure compliance with Basel III
Here is an overview of best practices European Banks are likely going to display.
Assessing Impact on European Banks
Due to new compliance regulations, banks will have to follow the Q2 20100 balance sheets. This implies that in future, by 2019 banks will need €1.1 trillion extra per capital in addition. Moreover, they will need €1.3 trillion for short term liquidity and €2.3 trillion for long term financing. Lastly, banks will be required to eliminate any acts that lead to mitigation.
The Basel III standards focus on capital and financial support. It sets latest capital target ratios that are marked out to as “7.0% of core Tier 1 requirements.” The minimum Tier 1 requirement for best practices is 4.5%, and a capital of minimum 2.5%. The maximum limit for Tier 1 capital is 8.5%.
Furthermore, Basel III has set new standards and requirements for both short term and long term funding. Implementation of these changes will impact European banking gradually. The impacts of new compliance regulations will be seen by 2016.
New compliance regulations for European banks will subsequently affect U.S banking. There will be shortfall on the capital and funding by banks. The overall impact will also be seen on business segments in Europe and the US. Therefore, best practices in implementing Basel III have become the main focus of the new regulations for 2012.