Great Analysis of Basel III by S&P

I have kindly received the permission from Standards and Poor's to publish this analysis on the effects on corporates from Basel III and Solvency II. I'm not opposed to tightening of capital requirements as such since it will impose higher financial discipline in society. However the most disciplined and well governed sector is the corporate sector and they do not need higher capital requirements per se. We also need to consider the large tax burden the European corporations has to pay, e.g. largest social contribution, high capital gains and income taxes for entrepreneurs, large hidden taxes in the sense of immense and multi-layered bureaucracy and expensive labor laws. All these costs has to be financed. If the highest capital requirements are imposed on the corporates, how are they going to finance all this and have any cash over to run and grow the business? That is the crucial question.

We also see a significant risk for the SME sector, being the weakest parties of the supply chain, already basically unable to attain sufficient financing. We should respect that a very large part of the population is employed in SME and they require working capital. If the banks are pushed out from SME financing the strongest company in the supply chain will need to step in or we need to find other solutions.

The sector in most urgent need of very tight governance are the sovereigns but they will remain capital requirement favored. The crowding out of the corporate funding is a huge risk, which will continue to enforce the misallocation of capital being a major cause behind the present crisis. We need a paradigm shift in regulatory strategy. 

An interesting quote from the S&P paper on new initiatives in the corporate financial markets:

"When considering the future, it’s tempting to make the mistake of projecting changes in a static environment. Capital markets have in the past shown their capacity to reinvent themselves with the emergence of new players and innovative sources of funding. In the current transition phase that could prove to be challenging for corporate borrowers, we believe such innovation may well influence the development of the capital markets."