Global bankers should be more grateful for Basel

The past six months has been a challenging period for global bank shareholders. Global banks have declined by 20% since August, well below the 5% decline in the broader global market index. European banks, particularly those in the periphery countries, have delivered dismal returns. Despite the reduction of European banks' non-performing loans in the past two years, they still account for 7% of total loans, well above other developed markets. In dissecting the global bank sector under-performance, I show that those that have delivered the worst returns have been the riskiest with low loss absorbing capital. Despite global bankers' predictable chorus since the financial crisis that more stringent capital regulatory requirements are impeding their ability to lend, Evidente's analysis demonstrates that banks with more loss absorbing capital have been resilient to the market turbulence of the past six months. Global bankers should therefore be grateful to Basel and conservative prudential regulators. It also suggests that Australian banks should voluntarily continue to build their loss absorbing capital buffers, without having to be coerced by APRA. (VIEW LINK)