The City of London Corporation has published a report it commissioned from Europe Economics on the future of banking regulation. The report focuses on the effects of the Basel proposals on capital and liquidity. The report concludes:
- the most important measures needed must address resolution regimes, liquidity and the structure of prudential supervision;
- while there is a case for some change to capital requirements, the value of Tier 1 capital should not be seen as a way to prevent all bank failures, and the way in which Basel proposes that Tier 2 should form a buffer seems ill founded;
- there is a role for counter-cyclical buffers;
- contrary to industry views, Europe Economics is not convinced of the need for further international coordination of banking regulation;
- in the short term, UK banks are likely to increase their capital holdings and reduce their risk-weighted assets, but in the longer term capital requirements will reduce the riskiness of the sector; and
- although the UK banking sector is under threat, the threat does not come from Basel, which neither solves not adds to the problems.