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Basel Committee Points Out Future Capital Requirements

by Ulrika Lomas,, Brussels

20 December 2010

The Basel Committee on Banking Supervision, while issuing the final text of the Basel III rules which represent the new global regulatory standards on bank capital adequacy and liquidity, pointed out the substantial additional capital that will be required by the larger banks during the transitional period.

The rules text presents the details of the Basel III Framework, which calls for higher and better-quality capital, better risk coverage, the introduction of a leverage ratio as a backstop to the risk-based requirement, measures to promote the build-up of capital that can be drawn down in periods of stress, and the introduction of two global liquidity standards.

Nout Wellink, Chairman of the Basel Committee and President of the Netherlands Bank, described the Framework as "a landmark achievement that will help protect financial stability and promote sustainable economic growth. The higher levels of capital, combined with a global liquidity framework, will significantly reduce the probability and severity of banking crises in the future."

For example, the rules will increase the minimum requirement for common equity, the highest form of loss-absorbing capital, from 2% to 4.5% after the application of stricter adjustments. This will be phased in from January 1, 2013 to January 1, 2015. Furthermore, banks will be required to hold a capital conservation buffer of 2.5% to withstand future periods of stress, bringing the total common equity requirements to 7%. The buffer requirement will be phased in from January 1, 2016 to January 1, 2019.

The Committee said that it has put in place processes to ensure the rigorous and consistent global implementation of the Framework. The standards will be phased in gradually so that the banking sector can move to the higher capital and liquidity standards while supporting lending to the economy.

The Committee also released the results of its comprehensive quantitative impact study, with a total of 263 banks from 23 Committee member jurisdictions participating therein. This included 94 Group 1 banks - those that have Tier 1 capital in excess of Eur3bn (USD4bn), are well diversified and are internationally active. The estimates presented assume full implementation of the final Basel III package, based on data as of year-end 2009.

Relative to the 7% total common equity ratio, the Committee estimated that Group 1 banks in aggregate would have had a shortfall of EUR577bn at the end of 2009. As a point of reference, for this sample of banks the sum of profits after tax and prior to distributions in 2009 was EUR209bn. It pointed out, however, that, since the end of 2009, banks have continued to raise their common equity capital levels through combinations of equity issuance and profit retention.

Wellink noted that "the Basel III capital and liquidity standards will gradually raise the level of high-quality capital in the banking system, increase liquidity buffers and reduce unstable funding structures. 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".

The Committee is also conducting further work on systemic banks and contingent capital in close coordination with the Financial Stability Board. In the coming days, the Committee will also issue a consultation paper on the capitalization of bank exposures to central counterparties.

TAGS: compliance | investment | business | law | banking | agreements | standards | regulation

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