Basel III: Banks need ¤ 602 billion to meet new guidelines

Geneva: Banks would have required an additional 602 billion euros in capital at the end of 2009 to meet new Basel III rules aimed at ensuring they could cope with any fresh financial crisis, regulators said last week.

If the international rules on raising top quality capital from 4% to 7% of risk assets were applied to banks at the end of 2009, “group one banks in aggregate would have had a shortfall of 577 billion euros”.

In addition, “group two banks... would have required an additional 25 billion euros”, the Basel Committee on banking supervision said in a study on 263 banks from 23 member jurisdictions. Group one banks are made up of big international banks that have core Tier 1 capital in excess of 3 billion euros ($3.9 billion) and group two includes all other banks.

While the study examined the ability of banks to apply the new regulations at the end of 2009, in reality, they have several years — to 2019 — to reach full compliance.

They would be required to raise common equity — the strongest form of loss absorbing capital, to the equivalent of 4.5 percent of overall risk assets by January 1, 2015 from 2% at the moment.

In addition, banks would be required by January 1, 2019 to set aside an additional buffer of 2.5% to “withstand future periods of stress,” bringing the total of such core reserves required to 7%.

“The transition period provides banks with ample time to move to the new standards in a manner consistent with a sound economic recovery, while raising the safeguards in the system against economic or financial shocks,” said Nout Wellink, Chairman of the committee.

The study also pointed out that “since the end of 2009, banks have continued to raise their common equity capital levels through combinations of equity issuance and profit retention.”

The global financial crisis in 2007-2008 forced many governments in industrialised countries to rescue their commercial banks, since allowing the biggest ones to fail could have brought down whole economies.

Regulators have since moved to toughen up capital rules, in a bid to prevent a repeat of the crisis and make banks more resilient to crisis shocks. In addition to the new capital rules, further curbs are expected to be imposed on major banks judged to have systemic importance.

Basel regulators give some countries extra leeway

London: Global regulators said on Thursday that banks in low debt countries like Australia and Denmark will get more leeway to comply with tough new liquidity rules.

World leaders agreed in Seoul last month that the Basel III bank capital and liquidity rules would be phased in between 2013 and 2018. They replace Basel II which failed to ensure banks had enough capital to withstand the credit crunch, leaving taxpayers to inject trillions of dollars to shore up the financial system.

The rules were authorised by the global Basel Committee on Banking Supervision which published its final text last week.

Denmark, Australia and a few other countries have low government debt or small corporate bond markets, making it hard for banks to comply with the new requirements that the bulk of a liquidity buffer must be in the form of highly rated sovereign debt.

“If you fall within that threshold, then there would be alternatives that could be used,” Stefan Walter, Basel Committee Secretary-General, told Reuters.

Work on these alternatives, such as use of another country’s debt or use of covered bonds, continues.

The liquidity buffer comprises a short-term liquidity coverage ratio (LCR) and long-term net stable funding ratio (NSFR).

“We have made changes to the NSFR to provide for a level playing field across business models, such as retail business models versus wholesale banking,” Walter said.

Analysts welcomed the greater flexibility.

“I think it’s going to be positive for Australian banks as there was still a strong element of apprehension -- that the liquidity standards are not going to be carved in stone means everyone can shrug and get on with their lives,” said Ismael Pili, head of Asian Financials Research at Macquarie in Hong Kong .

Pili said the Basel committee was trying to please those who wanted tougher standards and bankers who say the sector must not be hit too hard.

“So what they are doing is setting a set of standards everyone should be able to meet and then give national authorities the ability to add on extra measures as they see fit,” he said.

Banks have warned they may struggle to meet the new requirements and keep lending to aid economic recovery but the regulators said they now had plenty of time to act.

“The transition period provides banks with ample time to move to the new standards in a manner consistent with a sound economic recovery, while raising the safeguards in the system against economic or financial shocks,” said Basel Committee Chairman Nout Wellink.

Walter said the text provided a sufficient level of detail so banks can start planning to implement the new rules.

Basel III will require banks to increase their Tier 1 capital ratio to 7 per cent, which includes a capital conservation buffer of 2.5 per cent, though many big banks are already above that level due to local supervisory demands.

The committee said its study showed that if the 7 per cent ratio had been applied in December 2009 there would have been a shortfall of 577 billion euros ($768.7 billion) for the world’s top 94 internationally active banks.

The Bank of Italy said Italian banks need to boost their capital base by 40 billion euros to comply with Basel III.

Delayed Basel rules a boon for banks

Brussels: Basel bank regulators said rules on capital requirements would have cost financial institutions ¤ 602 billion ($797 billion) had they been in place at the end of the past year.

Banks also would have had shortfalls, including a ¤ 2.89-trillion gap in “stable funding” necessary to meet separate liquidity requirements, the Basel Committee on Banking Supervision said. The committee agreed in July to phase in the capital and liquidity rules by 2019 in a bid to mitigate their effect on lenders emerging from the biggest crisis since the Great Depression.

Regulators are overhauling bank capital and liquidity requirements because existing rules, known as Basel II, failed to protect lenders from insolvency during the financial crisis. The main elements of the overhaul were approved by leaders of the Group of 20 countries last month.

“The transition period provides banks with ample time to move to the new standards in a manner consistent with a sound economic recovery,” Nout Wellink, the Chairman of the Basel committee, said in a statement on the group’s website.

The Basel committee said that the ¤ 602 billion would have been needed for banks to cope with a requirement to hold core capital equivalent to 7% of their assets, with these assets weighted according to their riskiness. The figure has been calculated by regulators based on data collected from 263 banks.

Banks that don’t meet the requirement when they enter into force will face restrictions on paying dividends, regulators have said. “Internationally active banks” with more than ¤ 3 billion in Tier 1 capital , a broader measure of banks’ reserves, would have needed as additional ¤ 577 billion of core capital to satisfy the rules, while other banks surveyed would have needed ¤ 25 billion, the Basel committee said.The ¤ 2.89-trillion gap is the group’s calculation of banks’ liquidity shortfall against a so-called net stable funding ratio. That ratio, scheduled to be put in place in 2018, aims to limit the mismatch between the duration of loans and deposits, to ensure that banks don’t face cash flow problems.

Lenders at the end of 2009 would also have had a shortfall of ¤1.73 trillion in the assets necessary to meet a separate liquidity coverage ratio, which will measure banks’ ability to survive a 30-day credit crunch. That ratio is scheduled to be effective from 2015. Banks that fail the minimum liquidity requirements could meet them by “lengthening the term of their funding or restructuring business models,” the Basel committee said.

“The actual impact” of the new Basel requirements “by the time they are implemented will likely be lower as the banking sector adjusts to a changing economic and regulatory environment,” the committee said in its impact report.