Fortune published an interesting discussion on calculating capital threshold in Europe and America on Nov 2 (EST). In anticipation of Basel III, banks will be required to meet new thresholds. Moreover, the definitions for qualifying capital in calculation of threshold will become stricter. This change reflects how some banks, including certain major ones, have exploited the looser definition under Basel to their advantage – according to advocates of the new Basel III changes, a catalyst for the financial turmoil we are now in.
European regulators have given much more leeway to bank managers in determining the riskiness of their assets and what can be counted as capital under Basel II. For this reason, European banks have been classified as bearing lower risks than its American counterpart for an unjustifiably long time, even after the financial crisis. European banks reportedly have bent the definition to basket those assets with high leverage as low risk due to the potential to take equity returns. Ironically these assets have become “safer” since the onset of the financial crisis; sovereign debts previously seen as low risk but are now being held responsible for furthering the damage to the global economy. The US by contrast has tighter rule sand requires banks to place 5% capital against assets, regardless of the risk level of their assets.
Readers may access the full discussion on Eurozone crisis and banks here.