A decade on from the financial crisis, things seem to be looking up for the industry. Crypto players should take note.
When it comes to Basel III, it is all starting to look like an unqualified success. That is quite something to say given the now dimly remembered, panic-ridden days of the global financial crisis and the uncertainty that followed for years afterward.
Now that enough time has passed, the Basel for Committee on Banking Supervision probably thought it appropriate to release an extensive look back on Wednesday related to the impact of the extensive package it introduced then.
Its take is a surprising one: The weakest institutes have improved the most.
No Real Costs
Banks have become more resilient, and their current stability has not come at the expense of their cost of capital, particularly the most severely impacted ones.
The report examined bank-level data agnostically from just after the crisis to 2019, acknowledging that it was a period characterized by high growth, low-interest rates, and accommodative central bank monetary policies.
Although conditions have changed dramatically since then, a separate report looking at the initial impact of the COVID-19 pandemic seems to indicate the framework worked as intended and the industry is in a position to absorb shocks, and not amplify them.
CET 1 Increases
Since the crisis, banks have raised Common Equity Tier 1 (CET1) levels markedly, with ratios rising the most for banks most affected by the new framework. In other words, they had the lowest ratios compared to peers during or before the crisis.
They also experienced the greatest improvement in market-based resilience measures, an achievement the committee suggests was related to Basel III reforms. Importantly, the increase was driven by increasing capital in the banking system and not by curbing exposures or risk-weighted assets.
On average, leverage ratios also benefited from improved liquidity resulting from banks increasing their holdings of high-quality assets while cutting their reliance on short-term funding.
Less Systemic Risk
Encouragingly, the report’s authors also found the financial system is not as vulnerable as it once was and higher capital and leverage ratios cut the level of systemic risk, particularly for globally relevant institutions.
That should come as particular relief for the Swiss government, which stepped in to rescue UBS during the financial crisis.
«Overall, this suggests that enhancing banks’ capital positions, an objective of the Basel III reforms, dampens the negative feedback effects between banks under stress and reduces negative spillovers to the real economy,» the report indicated.
Lending Growth
Complying with Basel III helped banks cut debt and equity costs as well, with the report indicating there was little evidence to suggest that banks with the weakest ratios at the start of the crisis saw less subsequent loan growth than peers.
While bank employees can now feel significantly better about the solidity of the institutions they work for, the improvement seen over the last decade and a half is also an ideal case study for the crypto industry.
Strengthening rules and practices can be of clear long-term benefit, which is a very salient lesson for everyone as lawyers, exchanges and supervisors start picking up the pieces from FTX's collapse.
