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Banks' equity - "Basel III costs 46 000 jobs"

Published: July 21, 2010; 00:00 · (Vindobona)

The stricter rules for the equity of banks will reduce lending by up to 20 percent, says the Institute for Advanced Studies (IHS) in Vienna.

Banks' equity - "Basel III costs 46 000 jobs" / Picture: © Vindobona.org

That could “cost” 46,000 jobs.

More stringent capital requirements by the Basel rules III would affect the real economy of Austria, these are the findings of a study by the IHS. The banks will decrease their lending by up to 20 percent, if they struggle to cover their increased capital requirements. Economic growth in the short term (one year) would decrease by 1.7 percent, in the medium term (after 5 years) by 2.5 percent, while up to 46,000 jobs could be lost.

"The introduction of Basel III is taking place at the wrong time," said the author of the study Bernhard Felderer on Wednesday when presenting the study, a total of seven large and small institutions, and thus involving 55 percent of the banks. The Austrian SMEs (small and medium enterprises financed) their investments through bank loans rather than through capital markets. The banks, therefore, played an important role in the recovery from the economic crisis. Felderer could imagine the new rules to be introduced gradually. President of the Economic Chamber Christoph Leitl, demanded that the U.S. Should first introduce the currently valid framework of Basel II, before Basel III is discussed on a European level.

No precise data on equity

The BIS (Bank for International Settlements) presented a paper in December in which is designed more stringent rules for what may be counted as equity in the future. Details of the amount of equity however were not included in the paper.

"These capital levels are only the lower limit of what banks have to keep," said Felderer. If they want to pursue their business, banks need a capital cushion "significantly greater than that." The amount of equity of individual institutions depends on the type of transactions and their risk taking.

The 20 leading industrial and emerging countries (G20) had decided at their summit in June that the launch date itself can be decided individually by country. "Capital markets and rating agencies will exert pressure on those institutions that have not yet implemented the rules." This may lead to problems for them to finance themselves.