ZEW Survey Among Financial Market Experts: Good Marks For Basel III – Systemic Risks Remain

Basel III better protects banks from future crises. That is the opinion of the majority of 214 financial market experts surveyed by ZEW on the proposed new international rules on bank capital standards known as Basel III. According to the experts, in particular the higher core capital quota set by Basel III and the stricter definition of core capital should increase the stability of banks. The introduction of a leverage ratio should have a stabilizing effect on banks as well.

The Basel Committee on Banking Supervision has agreed on profound changes for controlling banks’ equity also known as Basel III. The heads of states and governments will decide on Basel III at the G20-summit in Seoul in mid-November. Overall, the experts participating in the ZEW survey think that Basel III is suitable to lower the banks’ risk and to increase their stability.

Around 92 percent of financial market experts are in favour of an increase of the core capital quota, also known as Tier 1 capital ratio, from currently four percent to six percent in 2019. The core capital quota is the ratio of common shares and retained earnings to risk-weighted assets. A higher core capital quota increases the ability of banks to withstand possible losses.

Moreover, 85 percent of the financial experts are in favour of a stricter definition of core capital. According to Basel III, silent deposits, for example, will not longer be part of core capital of incorporated banks because they often cannot be used immediately to cover losses. A stricter definition of core capital should, hence, make banks more resilient against potential losses as well.

Around 82 percent of financial market experts expect that the introduction of a non-binding leverage ratio should raise the transparency on financial markets and make banks more stable. The leverage ratio is the ratio of equity to total assets. According to Basel III, banks should not drop below a leverage ratio of three percent.

The introduction of an equity charge for systemically important banks has not yet been introduced under Basel III, but is currently under discussion. 58 percent of experts think that an equity charge should raise the stability of credit institutions that are relevant for the whole banking system.

In contrast, 82 percent of financial market experts have the opinion that the bank levy, which was recently implemented by the German government, will not increase the stability of banks. The bank levy requires German banks to pay part of the costs caused by financial crisis themselves by creating a security account into which the banks have to pay around 1billion euro in total annually.

Basel III aims at better protecting individual banks against future crises. For this reason, 43 percent of experts share the opinion that Basel III will not reduce systemic risks in the whole banking sector. However, one third of experts participating in the survey is convinced that Basel III will make banking markets more stable.

For further information please contact

Matthias Köhler, E-mail: koehler@zew.de