Systemically important banks likely to be worse off under Basel III capital rules
Commentators anticipate that "too big to fail" banks will have to hold more capital than the minimum required under the new rules and that EU banks may be at a competitive disadvantage to other countries by more stringently imposing the new capital rules.Did the Basel Committee on Banking Supervision cave into the demands of the banks by watering down capital proposals and staving off new rules on liquidity standards?
Initial reports suggested that there was likely to be a new Basel III Tier 1 capital ratio of up to 8% including a 2% to 3% buffer, but in the end following Sunday's meeting the Committee opted to increase the capital ratio from 2% to 7%, which includes "core" Tier 1 capital of 4.5% and a "capital conservation buffer" comprising 2.5% of assets. The timeline for phasing this was "softened" with the 4.5% to be phased in by January 2015, and the capital conservation buffer by January 2019. The Basel III press release can be found here.
Today's newspaper reports suggest that some countries like the UK and US may impose even tougher capital rules on their banks and the feeling is that "systemically important" banks or those considered "too big to fail" should go beyond the announced minimum capital standards.Execution Noble said that the market will be "punitive" to banks which don’t meet a core Tier 1 ratio of 9.5% - 10% under new requirements by 2012. Its research has shown that the market is already applying a multiple discount to banks with weaker capital positions.
It said most of the banks in its universe would meet the minimum 7% core Tier 1 ratio by 2012, but it did highlight some banks which it said screened unfavourably including SocGen and Erste Bank. "Following numerous recent acquisitions totaling nearly 170 basis points of core Tier 1, Santander also screens poorly," said Execution Noble. "We continue to believe that BBVA needs capital when fully stress testing its balance sheet."
In a speech in Paris on capital requirements, Angela Knight, chief executive of the British Bankers Association cautioned that some banks may well be affected more than others by the new capital requirements and that there could be regulatory arbitrage in terms of how the new capital rules are implemented in different countries potentially putting EU banks at a competitive disadvantage.
She added that the CRD4 package [the fourth package of amendments to the EU Capital Requirements Directive] will be a test of this, as it puts the Basel requirements into law across Europe. "We are probably the only region that will be implementing Basel in this way and further we have to recognise that many countries will not actually be implementing some or all of its requirements," she said.
Date Posted:14th September 2010