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How capital rules impact economic recovery

By GB

The economic process looks rather slow and painful. Despite all the massive cash injection into ailing economies world­wide, more companies are still struggling.

Daily reports of one company or another close to bankruptcy is indeed wor­rying. Even more worrying is the fact that most of these companies operate in the advanced economies. The question therefore is, if giants are falling, then how much more minia­tures?

Developing countries have a lot of thinking to do, and must take cue from what the developed economies are doing to forestall the situation in the short-term. Even though it is clear that policy initiatives have not led to massive recovery as had been antici­pated, there is still hope.

Most importantly, the economic managers, finan­cial planners and policymakers in the advanced economies are always coming up with new ideas. They are looking for a holistic approach to solving the problem. They know that looking at the problems in isolation will not deliver a complete solution. In this vein, the bankers in the UK have looked at the new capital regime for banks, Basel II rules, and are of the view that it could have an impact on the recovery process, albeit negatively.

Reports that UK banks are finding it difficult to comply with the Basel II capital requirements and balance these with the pressure from the UK government and industry associations to hold lending to industry to pre-cri­sis levels is disturbing, but encouraging that the banks have taken steps to deal with the issue.

A UK daily, the Daily Telegraph has reported that the UK Treasury is con­sidering recommending changes to the Basel II capital requirements fol­lowing a request from the UK banks. The banks, have pointed out that increased lending requires extra reg­ulatory capital. Just before Christmas, Stephen Green, chairman of HSBC, on behalf of a group of major British banks, sent a letter to the UK Chan­cellor, Alistair Darling, saying that Basel II requirements were preventing their ability to lend in the current cli­mate. “The Treasury is reported as accepting that something needs to be done, even if only temporarily, and that it agrees that the current situation is pro-cyclical, that is intensifying the down-turn, but has said that any change would need international agreement”, an analyst wrote.

Bank capital funding by the gov­ernment is another option considered. These measures will include govern­ment guarantees for industry lending and insurance for mortgages, as well as a “bad bank” which would take toxic debts off the banks' books. Ana­lysts claim that all these actions would help banks reduce the capital require­ments tied to lending and strengthen their balance sheets. Guarantees and insurance would reduce the risk asso­ciated with these loans so reducing the risk-weighted capital figure and the corresponding regulatory capital requirements.

Developing countries, including Ghana, must also look at their economies critical and take the neces­sary steps to correct the anomalies. If Basel II would have an impact on the ability of Banks to lend in Ghana, then it must be looked at.

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