With the recent turmoil on financial markets the banking industry was quick to respond with more relevant guidelines for banks. The new Basel III, recently announced, is all about the amount and quality of capital held by a bank. Capital (in effect) is the amount of assets a bank must hold to be able to withstand drastic changes in the environment. The new rules dictate different levels of capital adequacy as well as capital with more liquidity. (Read here).Banks not meeting these guidelines have a number of options. The most obvious is to get the capital from their shareholders (either by raising additional capital, or retention of dividends). This is of course not an attractive option as it would ultimately lead to a reduction in valuation - something that neither executive management, nor shareholders really want.
The other alternative is to get more capital from clients, preferably capital that remains liquid. This means (in effect) that banks would want to ask their clients to deposit more money with them (but not in fixed high-yielding deposits). This also seems unlikely in an environment where fewer clients have capital that they could deposit, and they would definitely not like to do this in low (or no) interest bearing accounts.
The solution is actually painfully simple: banks should provide effective mechanisms to their clients that they can do payments without using capital-hogging instruments (like cash and cheques). In a recent study, it was found that Ireland could save EUR 1 billion annually if cash and cheques where to be eliminated from the system (Read here). This saving and the fact that cash will be reflected as capital on deposit with the banks, would help them comply with Basel III more easily. By implementing mobile payment solutions and making it easier for clients to embrace these electronic payment schemes (thus eliminating cash and cheques), banks will become more compliant without having to ask their shareholders to carry the can.
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