Basel III Rules Aims To Restore Order Among Banks M&A

Chaos in the banking industry over the last two years has brought mergers and acquisitions to a stand-still, according to

. Basel III has recently announced rules on capital requirements and liquidity, rules that are intended to shore up international banking systems against further shocks by allowing banks to know how much capital they need to retain for their purposes in the future. "The Basel III rules are game changers in the bank-industry model," says Karen Shaw Petrou, a managing partner at Federal Financial Analytics, a financial-industry consultant primarily to large institutions. "The capital rules will increase [banks'] cost of capital and decrease returns on equity, and that will drive M&A.…They'll all re-evaluate their positions and decide if they want to buy or sell." Barron's writes that "mergers also could help the banking industry offset declining earnings or substandard profit growth. The increase in capital requirements is expected to restrain earnings gains, as compliant banks won't be able to employ as much leverage now as they did in the past."