BASEL (MNI) – Banks will be required to more than triple their core
tier 1 capital ratios to 7% under the terms of a new global agreement
announced Sunday by the Basel Committee on Banking Supervision.
The accord, reached Sunday afternoon after months of wrangling
among countries with different banking structures, is intended to ensure
that the world’s financial system will be better placed to face future
shocks and loan losses.
The minimum ratio for core tier 1, which consists of common equity
and is considered the highest quality capital, will be raised to 4.5%
from the current 2%. In addition, banks will be required to hold a
capital conservation buffer of 2.5% to withstand future periods of
stress, bringing the total common equity requirement to 7%, the
Committee said. The ratio measures core tier 1 as a percentage of a
bank’s risk-weighted assets.
The minimum ratio for overall tier 1 capital, which includes common
equity plus other qualifying financial instruments based on stricter
criteria for banks worldwide, will increase from 4% to 6%, the Committee
added. With the conservation buffer, it will be 8.5%. The minimum
requirement for total capital will remain unchanged at the current level
of 8.0%, but with the buffer will be 10.5%.
Banks, many of which have warned that the stiffer capital
requirements could dampen lending and thus economic activity, will have
time to get used to the new regime. Implementation of the new tier 1
rules will be phased in starting in January 2013 and must be completed
by January 2015. The capital conservation buffer will be phased in from
January 2016 to January 2019.
The new rules, known as Basel III, are expected to force weaker
banks to raise billions in new capital over the coming years.
Systemically important banks will face yet tougher demands than the
standards announced today, the Basel Committee said, adding that it will
work with the Financial Stability Board to flesh out details.
Policymakers emphasized that new capital requirements will
significantly strengthen the resilience of the financial system without
derailing the global economic recovery.
Nout Wellink, chairman of the Basel Committee on Banking
Supervision, said the new rules “will ensure that banks are better able
to withstand periods of economic and financial stress, therefore
supporting economic growth” while the Swiss National Bank President
Philipp Hildebrand said the deal “will make the global financial system
more resilient” and “support the economic recovery.”
The purpose of the newly introduced conservation buffer is to
ensure that banks maintain a capital cushion that can be used to absorb
losses during periods of financial and economic stress, the regulators
explained. Banks will be allowed to draw on the buffer during bad times,
but the dividends they pay out must be reduced commensurately.
“A countercyclical buffer within a range of 0% to 2.5% of common
equity or other fully loss-absorbing capital will be implemented
according to national circumstances, the Committee said. “For any given
country, this buffer will only be in effect when there is excess credit
growth that is resulting in a system wide build up of risk,” it added.
Additional requirements for institutions that are considered too
big to fail could include “a combination of capital surcharges,
contingent capital and bail-in debt,” the Committee said. In addition,
work is continuing on strengthening resolution regimes, the statement
said.
“While the reform package is far-reaching, it does not yet
comprehensively address the too-big-to-fail problem,” Hildebrand said.
For the SNB, which is overseeing the two banking giants UBS and Credit
Suisse, the problem of institutions considered too-big-to-fail has been
particularly pressing.
“I remain confident that the expert commission on too-big-to-fail,
which the government convened earlier this year will converge around a
set of ambitious and effective proposals to tackle too-big-to-fail in
Switzerland,” Hildebrand said.
Today’s decision by the central bankers and heads of supervision
from the 27 member countries is seen as a milestone for the tougher
regulation called for since the beginning of the financial crisis.
Nevertheless, the decision falls short of calls for much stiffer
regulatory requirements, since it is a compromise between countries that
were ready to enforce stricter rules more quickly and others who favored
looser standards.
In particular, Germany had pushed for a looser definition of
capital and for a more protracted phasing-in period to allow its banks
to include their widely used “silent participations” and give them more
time to adjust.
This subject has been particularly sensitive for Germany because
public sector banks in particular have relied strongly on “silent
participations” and feared competitive disadvantages as a result of the
new requirements.
Deutsche Bank, the country’s largest in terms of market
capitalization, reacted pre-emptively last week, announcing a plan to
raise some E9.8 billion in a rights issue. The new capital is intended
in part to increase Deutsche Bank’s stake in Deutsche Postbank, but also
to ensure that it will meet the new Basel III requirements. Other German
banks will have to follow, Bundesbank Vice-President Franz-Christoph
Zeitler said earlier this week.
Bundesbank President Axel Weber greeted Sunday’s decision, saying
he was “happy that we have been able to reach an internationally
consistent and ambitious framework for new minimum capital requirements
for banks.”
Weber added: “The gradual transition phase will allow all banks to
meet the rising minimum capital and liquidity requirements. He noted
that the new agreement takes the special situation of non-listed German
banks into account.
European Central Bank President Jean-Claude Trichet also assured
that “the transition arrangements will enable banks to meet the new
standards while supporting the economic recovery.”
Top executives from some of the world’s leading banks had warned
about adverse effects from tougher Basel rules. The Institute of
International Finance (IIF) had said that a regulatory crackdown on
banks could cut 3% off economic growth over the next five years in the
United States, the Eurozone and Japan, and cost almost 10 million jobs.
At the time they made these assertions, the new capital ratio numbers
announced today were not available.
The Basel Committee and the Financial Stability Board rebutted
these assertions, saying that their own studies showed the new rules
would have a limited negative short-term impact.
“The analysis shows that the macroeconomic costs of implementing
stronger standards are manageable, especially with appropriate phase-in
arrangements, while the longer-term benefits to financial stability and
more stable economic growth are substantial,” FSB chairman Mario Draghi
said at the time.
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