Safe and Sound

If one regularly reads the mainstream business press, the natural tendency to peg broad and complicated issues into catchphrases becomes quickly evident. In banking, catchphrases such as “too big to fail,” “Dodd-Frank,” or “ The Basel Accords” are good examples of legislative and regulatory responses to another catchphrase: “The Great Recession.” It seems each generation of Americans has to re-learn from personal experience old and well-established economic axioms of supply and demand, along with the lack of sustainability of ever-increasing leverage. Bankers are in a risk management business that operates on substantial leverage of capital and it seems we too periodically must re-learn the old and well-established banking axioms of managing risk: credit, operational, interest rate, liquidity, price, compliance, reputational and strategic.

Capital is the lifeblood of banking and serves as a cushion to absorb the eight types of risk enumerated above. If a bank’s capital cushion is depleted, the bank fails. It’s easy to say, but more difficult to manage. The Basel Accords established, among other things, a global regulatory standard on bank capital adequacy, stress testing and market liquidity risk. Specifically, Basel III was the third installment of the Basel Accords developed in response to deficiencies in financial regulation revealed by the late 2000’s financial crisis. The purpose of Basel III is to strengthen bank capital requirements and introduce new regulatory requirements on bank liquidity and bank leverage. Clearly, all banks do not have the same risk profiles or mix of business, so it makes perfect sense to move away from a single capital ratio for all banks to determine whether or not a bank is appropriately capitalized for the level of risk imbedded in its balance sheet.

One might ask: who established these Accords and under what authority were they established? The Basel Accords were established by an organization known as Bank for International Settlements (BIS), headquartered in Basel, Switzerland. BIS was established in 1930 by the Hague Agreements and has offices in Hong Kong and Mexico City. It is an intergovernmental organization of central banks that fosters international monetary and financial cooperation and serves as a bank for central banks. There are currently 58 member central banks, of which our Federal Reserve is one, and the bank is not accountable to any national government. In many ways, this is simply another step in the globalization of the world economy.

Seaside is ahead of the curve as we already perform our own capital adequacy stress testing taking into account all forms of financial risk to ensure we operate a very safe and sound financial institution. If the global implementation of Basel III takes place on January 1, 2013, Seaside will be in an excellent position as we operate our company at capital levels well above the prescribed minimums. Since our inception, Seaside has been a well-capitalized company that operates under the highest standards. Our strategy and commitment to you is to maintain that posture into the future.

We remain ever vigilant to fulfill our promise to you and are extremely thankful for your being a member of the Seaside family.