New regulatory rules for banks could make lending less accessible

Photo: Barbora Kmentová

Basel III rules aimed at encouraging banks to steer clear of bad risks and making sure they have the wherewithal to cope if they hit a financial crisis are already partially in place. But the impact on sensitive countries such as the Czech Republic is still not totally clear.

Photo: Barbora Kmentová
Most agree that that the 2008 financial crisis was as much a regulatory failure as a market one.

Banks had been allowed to blur the lines between their normal low risk, low return, deposit taking and loan making activities and the high risk, high return, activities from peddling dubious financial instruments to each other and the investment community. The result was that banks looked less and less like firm financial institutions and more and more like casino players. The criticism holds as good for Europe as the United States.

The aftermath of the crisis bought the inevitable cries for the end of ‘light touch’ regulation and a clamp down on the reckless financial institutions and rogue traders stampeding towards the next deal and bonus.

One of the results, heralded in without much trumpeting, was the first helping of the Basel III rules at the start of 2014. The measures are being phased in until 2019 with the interpretation and application of the rules to some extent still a work in progress.

The Basel rules have traditionally sought to tell banks what sort of capital and assets they must set aside to cover the risk that some of their loans and other activities would go pear-shaped. The rules were shown to be clearly inadequate in the meltdown.

Basel III seeks to address some of the flaw by increasing the amount of capital and assets that banks must hold back to cover their risks. It also seeks to curb their enthusiasm for pursuing high risk and, potentially, high earning activities by adding on extra liquidity requirements for these, as well as an additional layer of security for banks estimated to be playing a significant role in the national economy.

The Czech reaction to this regulatory scramble has been somewhat cautious. First of all, major Czech banks were largely cleaned up of their toxic assets before they were sold onto foreign owners around a decade ago. Secondly, Czech banks had almost no exposure to the speculative, not to say reckless dealing in the dodgy derivatives and other assets at the heart of the financial meltdown. These were overwhelmingly reserved for the financial sophistication of the parent banks.

But the new capital rules will have an inevitable impact. By making banks hold back more assets to cover risks, less of that capital will be available as loans and the cost of loans to companies will increase, it is argued. Actually, some estimates put the maximum cost of Basel III as only 0.15 percent of GDP.

For the Czech National Bank and local policy makers another worry has emerged over the extent to which parent banks of the four biggest Czech banks, which are based in Austria, France, Belgium, and Italy, might seek to use the assets of their Czech banks to cover risks in their home and other countries. In a worst case scenario, it is feared this could result in a loan squeeze in the Czech Republic.

The concern is all the greater given that small and still developing economies, such as the Czech one, are regarded as still an ongoing need and ability to pump more credit into the economy than more developed, and usually more overdrawn, peers. Local banks are also reckoned to have less earning potential due to a series of disadvantages, such as the smaller bond market.

The central bank has already taken some steps to cushion the impact of the incoming requirements, for example by putting at zero level some of the extra capital requirements it has the discretion to levy under the Basel III framework. There is still plenty of room though for the impact of the new rules to be tinkered with and follow up measures are almost certainly in the pipeline.