Basel III Rules Could Put the Screws to Top Banks

Regulators and officials from 27 countries will meet in Basel,
Switzerland to create a new series of rules they hope will avert future
bank meltdowns.

The basic issue is how much Tier 1 capital (cash and assets) banks need
to have to provide a cushion against bad loans. The first step will be
re-defining “cash and assets.”

At the last Basel conference, Basel II, banks were allowed to count tax
credits and certain mortgage-backed assets as Tier 1 capital. Form a
bookkeeping perspective, a tax credit could be considered an asset, as it
would improve earnings. But no one will accept a tax credit as payment
for anything.

After re-defining Tier 1 capital, the Basel Committee on Banking
Supervision will decide how much Tier 1 capital banks must have. Right
now, banks are required to have core capital cushion (cash) of 2% of
“risk weighted assets.” Basel III might raise that requirement to 6.5% or

Obviously, that’s a big change in Tier 1 capital requirements. European
banks will have to raise money. Deutsche Bank (NYSE:DB) is already
planning to sell $11 billion in stock based on recommendations from the
recent “stress tests” conducted on European banks. Since U.S. banks have
already been required to raise capital after the U.S. Treasury “stress
tests”, they may not have to raise more capital.

But it’s likely that U.S. banks will continue to be reluctant to lend
once stricter regulations are in place. That may mean that small
businesses will increasingly rely on private equity firms for funding.

Right now, one of the top private equity stocks has a P/E of 4 and pays a
9% dividend.

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