Don't drive banks offshore

Author: | Published: 1 Dec 2008

Although we don't know the regulatory changes that will be agreed at international level over the next few months, we can form a surprisingly good idea of their effect. Increased capital requirements, higher risk capital charges and the tightening of trading book requirements will all increase the capital banks will require to operate.

Interestingly, this increase will be cumulative with another. The Basel II regime, which applies to almost all major banks, determines capital requirements by looking at historic loss data. For technical reasons it proved impossible to build old data into these models, meaning that the data feeding the risk models consisted entirely of the low default experience of the last (nice) decade. This translated into low risk assessments and low capital requirements.

However, the defaults and losses beginning to pile up will soon feed into the Basel risk models, pushing up the capital. This plus regulatory...