Cheap money era is over, warns BBA

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The Basel Committee on Banking Supervision has agreed that banks will require a minimum core Tier 1 capital ratio of 7%, up from the current 2%.

Under the Basel III rules banks will have to increase their core Tier 1 capital rartio to 4.5% by 2015.

In addition, they will also have to carry a conservation buffer of 2.5% by 2019 to protect against periods of difficulty.  

If banks capital ratios fall below 7%, the regulator might ban them from paying dividends and bonuses.

Some commentators have argued that most British banks will be unaffected as they currently have a Tier 1 capital ratio of 10%.

But Angela Knight, chief executive of the British Bankers’ Association, says even though UK banks are in a much stronger place than most on capital, the Basel changes need to be implemented over a long timetable and carefully sequenced to avoid prolonging the downturn.

She says: “The liquidity requirements are also significant, as these feed through to the price and the availability of lending.

“A bank is like any other business – if its fixed operating costs go up then so does the price of its product.”

She adds: “All the changes are good from a stability perspective but add billions to the fixed operating cost of a bank.

“The consequence is that inevitably the cost of credit – the price the borrower pays for money – will rise. The cheap money era is over.”