By David Barwick

SINGAPORE (MNI) – There is no justification whatsoever for banks
not to implement the new Basel III minimum capital requirements by the
stipulated deadlines, European Central Bank Governing Council member
Nout Wellink told Market News International on Monday.

Wellink, who heads the Dutch National Bank and is also chairman of
the Basel Committee On Banking Supervision, said on the margins of a
conference here that the boost to confidence produced by Basel III
should more than counter any negative impact on lending during the
implementation phase and yield a net positive long-term effect on
growth.

The new rules are clearly a burden for banks, which must come up
with substantial sums of new money in order to comply, Wellink said. But
he added that retaining more earnings can go a long way toward
satisfying the increased requirements.

Asked what would happen if banks proved unable to meet the
deadlines for phasing in gradual increases of minimum capital standards
over about eight years, Wellink replied, “I don’t think in terms of a
failure. I think it’s doable on the basis of the calculations we made.
Again, it has an impact of course on dividends. That is self-evident.”

“But having said that, I think we should realize that in the past,
profits were high, perhaps too high, and the same held for dividends,”
he added. “It is doable. The calculations made clear that the targets we
have set for capital are realistic. There’s no doubt in my mind. There’s
absolutely no excuse for missing the deadline.”

The Basel III accord will require banks ultimately to maintain core
tier 1 capital ratios of at least 7%, more than triple the 2% level in
current regulations. In a first phase, banks would need to lift the
ratio to 4.5% by 2015. The 7% requirement, which includes the addition
of a 2.5% buffer on top of the 4.5%, would be fully phased in by 2019.

Despite the Basel Committee’s reliance on about 100 models from a
range of different sources to predict the economic impact of Basel III,
the inexact nature of the exercise leaves some residual uncertainty as
to the actual outcome for growth rates and levels, Wellink conceded.

Still, he said, the prevailing view is that “in the transition
period the negative impact is minimal, really minimal. And in the steady
state situation, after the implementation of the full package, it is
positive because the probability of a default will be substantially less
than in the past and there will be less volatility with respect to GDP
growth.”

“There is no doubt in my mind,” he emphasized.

Critics such as the European Banking Federation (EBF) are off the
mark and relying on false assumptions, Wellink complained. “If it adds
to confidence, then this is the stronger effect. The public at large,
society and the economy are better off with a stronger banking system.”

He added, with regard to EBF: “So I think they are really overdoing
it and they should realize that it is part of their responsibility to
bring the development of credit and [banks'] leverage back to normal
levels. And I think they should realize that it is in the interest of
the solidity of the system and therefore of the growth of GDP.”

Wellink nonetheless conceded that the new capital requirements are
“a burden” for banks, given that “they have to raise quite a lot of
money.”

Still, “that’s over a long period,” he observed. “My feeling is
that an important part of that money can be raised by profit retention.
This is on the basis of a kind of extrapolation of the profits they made
during the last ten years. But it’s a burden for them. This is a
consequence of the fact that capital levels were too low in the past.
For us this is one of the main lessons to be drawn from the crisis.”

Reactions to Basel III in the markets and by analysts have been
“very positive,” even if there have been some claims that Basel III was
weakened too much, Wellink said. “We saw some unintended consequences,
and if you have unintended consequences, you have to take action, of
course. It is an ambitious but feasible package we have put on the
table.”

The package is based on “a new, purer, better and more solid
definition of capital,” Wellink asserted. “The definition in the past
was a much looser one.”

There is “absolutely not” any question of a credit crunch resulting
from the new rules, he insisted. It is also not the case that, as the
EBF has asserted, Basel III distorts the relative competitiveness of the
U.S. and Europe, he said.

“What will happen is that some activities that are less relevant in
a broader economic context will have to be reduced,” he said. “What we
are basically doing is putting pressure on banks to go back to their
core business — that is supporting normal economic activities.”

“Wherever a bank is located and whatever we do, they are all
complaining about a deterioration in their competitive position,” he
noted.

–Frankfurt bureau tel.: +49-69-720142. Email: dbarwick@marketnews.com

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