Banking Regulations May Create "Financial Darwinism"

New Basel III capital requirements and other banking regulations may stifle economic activity and hurt banks, according to

. Jochen Sanio, Bafin regulator, speculates that only larger banks will be able to survive the requirements, creating “financial Darwinism,” according to the article. The capital and liquidity rules were made public in December. The new capital requirements more than double the core capital that banks are required to hold to provide a safety net from losses. Banks also must hold enough liquid assets to ensure survival for up to 30 days. Indeed, smaller banks may have trouble remaining profitable because of these strict regulations. It is possible that smaller banks could phase out and the economy is left with primarily large, systemically important banks. This might initiate the very problem Basel III rules were designed to avoid. Not only could smaller banking institutions be damaged by the capital and liquidity requirements, but Sanio suggests larger institutions could be impaired as well. Regulations dictate that systemically important banks are subject to even higher capital requirements. New regulations were deemed necessary following the global financial crisis, however experts worry that economic activity may be stunted with the Basel III requirements. According to the article, Sanio believes the higher capital requirements may not eliminate the systemic risk. As banks make adjustments to meet the requirements, the consequences, intended and unintended, will be revealed.