Banking’s Bigger Buffers

21st September 09 – Banking’s bigger buffers

For the second time, this diary can capture the deliberations of a bi-annual meeting of the finance ministers of the G20 group of nations. The main outcome of the decisions taken this time around is that banks will have to maintain bigger buffers under the new framework now agreed, once the financial crisis has passed.

Unlike the US and UK’s banking capital provisions, those of European mainland banks have buffers made up of so called “hybrid” securities that are more like debt than equity. Analysts believe that some European banks have met as much as half of existing regulatory requirements on capital buffers this way. Bernd Brabander, MD for economic affairs at the Association of German Banks said that proposals to cap the overall level of debt that a bank could hold in relation to its size, could put European banks at a competitive disadvantage.

Another principle established at the latest meeting of the G20 was that complex financial institutions should develop “living wills” to plan for their unwinding. Thirdly, banks will have to retain some portion of the loans they repackage and sell as asset-backed securities.

Bernd Brabander also said of the new proposals “The bit about leverage ratios really makes me a bit nervous.” Having just passed the anniversary of the collapse of Lehman Brothers, that must be the jaw-dropping mollification of the decade.