BASEL-III: Fall of the banking pack. and rise of the IT pack (One man's poison is another man's cure)

We have seen that the banking pack has lead the recent market tumble.. and surprisingly the IT (Information Technology) end of the market is going strong in-spite of all odds..(is it just the Rupee arbitrage??)

what is the underlying principle for the rise of IT and the Fall of the Banks..

Surprisingly the answer to both the IT and Banking industries "Boom and doom" is the same: BASEL III

One man's poison is another man's cure : 

BASEL III is the poison that is going to crush banking and
BASEL III is the cure which will increase demand for IT programmers just like the Y2K (Year 2000) Bug years..

BASEL III agreements were set into motion to provide a "Global" regulatory framework for more resilient banks and banking systems
BASEL III sets international framework for liquidity risk measurement, standards and monitoring.
BASEL III objective is to improve banking sector's ability to absorb shocks.
BASEL III objective is to reduce risk spillover to the real economy.
BASEL III sets micro level prudential regulation at individual bank levels
BASEL III sets macro level prudential regulations at system wide basis..

All this "prudential regulations" at the micro and macro level means a lot of custom code for the banks. Since BASEL III is Global regulations you can expect Indian IT foot soldiers "on the move" implementing BASEL III worldwide..

Welcome back to the "golden age" for IT again..

Banking's Poison

BASEL III rules and regulations are going to squeeze the banking industry from both ends.
- lending restriction by enforcing "Risk Weighted Assets"
- Increase in Capital requirements.

There is an understanding that Indian Banking system is not so leveraged and will be able to sail through.. but that's not true..

Capital Adequacy Ratio" which is an indicator of strong financial status ..
It seems a bank with capital adequacy ratio of 11.1% in old system .. under the new BASEL III will have capital adequacy of 5.7% due to new definition and subsequent adjustment of capital due to increase in risk coverage due to "Risk Weighted Assets".

The BASEL III rules are going to be implemented in phases and starts from 2013..for next 10yrs (now we know why the banks are falling like nine pins .. and will continue to remain suppressed)

CET1(Common Equity Tier-1) is going to see "deductions" starting 2014 and hence we can expect more equity capital raising by banks to meet the increasing deductions. Equity capital requirements for Indian banks according to estimates is close to 1Trillion Rupees (1 lakh crore)

"Disclosure's start Jan 1,2015" i.e all reporting will have to be based on BASEL III  .. you can expect reports about drop in banks financial strength and lower earnings.

BASEL III will result in sluggish growth, high unemployment for the economy and increase in "resolution cases" and low returns on investment for the banking industry.

Increase Equity capital or reduced loan books.. we might see both these steps based on banks ability to raise equity or not.. higher capital requirements will force reduction in dividend payout to investors..

It will be easier to use the Non Banking Finance Company (NBFC) to fund risk assets as banking rules donot apply to NBFC. Expect NBFC to outperform banks and NIFTY

Expect higher interest rates, higher down payment for housing loans... this could result in lower demand which will result in falling/stagnant real estate values/prices.

RBI Document for BASEL III (Link)
Institute of International Finance (Measuring the cumulative impact of BASEL III Sept 2011)
Basel III in International and Indian context (10 questions we should know the answers for) Dr D Subbarao
BASEL-III PWC:Navigating changes in banking capital