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God has spoken

After a long, tortuous journey, the new Basel III rules are about to be announced by the Inner Circle of the World Banking elite, and it looks like a significant increase in capital requirements is on the cards.

The UK’s Daily Telegraph reports that there’s a purge ahead for the world’s banks as the new capital rules will likely trigger a second credit crunch.  Look for gold to spike, look for spreads to widen and CDS rates to jump all over the place.  And some European banks to fall.

On Sunday, the Group of Governors and Heads of Supervision, the oversight body for the Basel Committee, will meet to give their assent to the rules, which means markets will have to wait until Monday to give their verdict on the new capital requirements for banks.

This prospect of more uncertainty, speculation growing that the new capital ratios required will be higher than originally expected, made for a volatile day of trading, with the STOXX indices of European bank shares falling 1.5pc, while gold prices rose on fears over the health of the region’s banking system.

Current expectations are for a doubling in core Tier 1 capital ratios from 2pc to 4pc, while the minimum Tier 1 capital requirement could also double to 8pc.

Reports in the German press suggest the requirements for banks could be even higher, with Die Zeit saying that a Tier 1 ratio of 9pc was possible, as regulators look to ensure that the financial industry maintains adequate buffers against potential future losses.

Implementation of the rules is expected to be allowed over several years to prevent the glut of new bond deals that would crowd the market if banks were forced to raise new money all at the same time.

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