Cheap money era is over, warns BBA

The British Bankers’ Association has warned that the extra capital requirements being placed on banks will lead to the end of the cheap money era and increase mortgage costs.

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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.”