by Stephen McPhie, CA
Partner RSD Solutios Inc.
Basel I was a laudable start at trying to set up some sort of level international playing field for banks. However, it was far too simplistic, had too many gaps and was way behind the sophistication of major market participants. Basel II was a major theoretical step forward in the concept of risk weighting assets. However, as we have seen, risk adjusted assets were totally and widely misstated with the result that many large banks did not have the capital to support the risks they were taking. Now Basel III focuses on vastly more capital. Perhaps the underlying thinking is that if we cannot calculate the denominator properly, and creative geniuses might continue to find ever more ingenious ways to make pebbles look like diamonds, then jacking up the numerator should make us all feel better.
Higher capital can mean lower Return on Equity, but will that encourage investors to come up with all that extra capital? Otherwise, higher capital means higher margins on loans and higher fees on other bank products. How are you planning for such an eventuality which will affect most businesses and people personally?
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