Beware 2018, when the next perfect banking storm may hit

Those looking for when the next financial crisis might be should set a reminder for January 1, 2018.

That’s when a host of new rules are scheduled to come into force that are likely to further constrain lending ability and prompt banks to only advance money to the best borrowers, which could accelerate bankruptcies worldwide. As with any financial regulation, however, the effects will start to be felt sooner than the implementation date.

Two key rules are slated for 2018: the leverage ratio set by the Basel Committee on Banking Supervision and International Financial Reporting Standard No. 9, defined by the International Accounting Standards Board. Other rules that require banks to stop using their own internal measures to assess risk start to be introduced from next year.

Basel III has already been blamed for reduced liquidity in global markets and slower credit growth. What’s about to be rolled out will be a steroid shot to that.

New Basel rules aimed at reducing the leeway banks currently enjoy on how they account for risk will come into effect over the next two years. The regulations imposed after the global financial crisis already require banks to set aside more capital for every dollar they lend, depending on a borrower’s credit standing. The trouble is, global regulators left the decision on creditworthiness mostly to the banks themselves. A 2013 Basel study found variations of as much as 20 per cent in the risk weighting attached to similar assets.

Starting from 2017 therefore, financial institutions will no longer be able to use their internal models to assess risk for derivative counterparties. In 2018, that will be expanded to securitisation and thereafter – though the exact date is yet to be determined – lenders will have to evaluate all of their loan clients based on standards set by the Basel committee.

As former Bank of England Governor Mervyn King noted recently, the massively detailed banking legislation that was enacted after the last financial crisis has certainly created a lot of jobs for lawyers and compliance officers. Perhaps those two areas will be the only bright spots post 2018.

Full article: Beware 2018, when the next perfect banking storm may hit (The Sydney Morning Herald)

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