It is good that banks are required to have adequate capitalization to face losses, but it is not good that they are forced to overcapitalize.
Dominican banks have applied the Basel I and II overcapitalization agreements, with certain adjustments that have taken into account the “degree of discretion that countries can adopt according to the characteristics of their financial sector, provided that the established minimums are respected.”
At least that is what has been proposed. Manuel Gonzalez M.technical director of the Association of Banks, who clarifies that the Basel agreements allow each country to “adopt standard methods with certain adaptations, not being obligatory to apply internal risk methodologies”, in addition to the fact that “the regulatory standards include credit, market, and operational risks, supervision based on those established by Basel and a broad level of information to the market from financial institutions”.
Taking all these aspects into account, the country’s banking sector has applied, according to González, “a standard or basic Basel II.”
What González does not see any sense in is that the banking sector should be subjected to a process of adoption in the full scope of what Basel II deals with and that Basel III, as reformed in Basel IV, should be implemented all at once.
He explains his reasons: it could lead to an organizational thickening (due to the necessary structure and the required people with skills in these aspects, in addition to possible greater capital requirements), affecting the costs of the entities unnecessarily, which in some way is transferred to credit, both in cost and quantity.
And it advises establishing a process to follow a path towards the adoption of Basel III (reformed Basel III or Basel IV), which takes into account that its implementation will entail hard work because modifications will have to be made “both at the level of law and of regulations and application instructions that this update of Basel incorporates, aimed at improvements in the quality and quantity of capital, incorporation of an additional capital buffer, countercyclical buffer, adjustments in credit risk weightings, the level of leverage, the establishment of the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR), as well as limitations on the application of internal models.”
The announcement just made by the Vice President of Supervision of the Federal Reserve, Michael Barrthat the US central bank will modify its plan to drastically reduce the additional capital requirements for large banks, bowing to the pressure that banks and interest groups have been exerting for a year against its proposal for the full implementation of the Basel III capital rules.
The new proposals would increase aggregate Tier 1 capital requirements for globally systemic banks, the largest and most complex banks, and non-systemic banks by 9% instead of the 20% initially proposed. The impact of the new proposal would arise primarily from the inclusion of unrealized gains and losses on their securities in regulatory capital, which is estimated to be equivalent to an increase of between 3% and 4% in long-term capital requirements.
The remainder of the new proposal would increase capital requirements by 0.5% for entities not covered by the standard.
It is good that banks are required to be adequately capitalized so that they have a financial cushion against possible losses, but it is not good that they are overcapitalized, which would lead to an inefficient use of resources that would be reflected in an increase in the cost of money, to the detriment of credit users and in lower profitability.
