The G20 leaders may want to strengthen the banks to forestall a future crisis, but they are not exactly busting a gut to do so. At their Toronto meeting, they set themselves the “aim” of having new standards by the end of 2012. Full implementation will follow at an uncertain pace thereafter. This is an unsatisfactory approach.
It is not hard to see why governments are treading carefully. Any significant capital strengthening will require the banks to raise very large sums indeed. While they have shored up their balance sheets since the 2008 crisis, this process has just in-filled their previous losses. An extra $700bn in equity alone could be required, worldwide according to the International Institute of Finance. To really de-risk the banks, this total could be much higher.
Such an injection can come only from profit retention or fresh equity. And here is the timing problem. The faster the implementation of the standard, the less time there is for banks to accumulate retained earnings to meet it, forcing them to raise more capital. Governments, dubious about banks’ ability to raise funds, are rightly wary of being forced to purchase bank equity themselves as buyers of last resort. Hence the desire to spin things out for as long as possible, giving the banks more time to accumulate retained profits.