The Basel Committee releases the results of its Quantitative Impact Study on capital requirements.
About decade early and near a trillion dollars short. Luckily that’s the position of banks today because had they been required to immediately adhere to the Basel Committees rules on capital requirements, it would have been a world of financial pain for banks around the world.
According to the results of its Quantitative Impact Study (QIS), if Basel III rules were fully implemented today, banks would be short about €577bn or about $769bn. The good news is that it’ll be a slow transition to meet the requirements, with banks not having to be Basel flush until 2019 (they actually will have to be close a few years earlier than ‘19, however).
“The capital shortfall for Group 1 banks in the QIS sample is estimated to be between €165 billion for the CET1 (common equity Tier 1) minimum requirement of 4.5 percent and €577 billion for a CET1 target level of 7.0 percent had the Basel III requirements been in place at the end of 2009,” the Committee wrote.
For US banks and likely those in Europe, lending practices won’t change immediately. And likewise for corporate treasury, aside from keeping up on where the best sources of funding are located, the situation won’t change right away. But bank behaviors bear watching in the near future: they are becoming increasingly hamstrung by more immediate regulations and can thus be cagey about lending.
Reining in banks
The Basel Committee back in September increased the minimum Tier 1 common equity – the highest form of loss-absorbing capital – requirement from 2 percent to 4.5 percent, which will be phased in by Jan. 1, 2015. In addition, it required banks to hold a “capital conservation buffer” of 2.5 percent to withstand future shocks. This brought the total common equity requirements to 7 percent. The additional 2.5 percent will be phased in by Jan. 1, 2019. The Committee hoped this level would reinforce the stronger definition of capital agreed to in July and the higher capital requirements for trading, derivative and securitization activities to be introduced at the end of 2011.
Bank participation
The Committee said 263 banks from 23 Basel member jurisdictions took part in the study. This included 94 Group 1 banks (those that have Tier 1 capital in excess of €3 billion) and 169 Group 2 banks. These banks were asked to submit consolidated data for the period ending December 31, 2009. There were also some follow-up requests to banks that were meant to refine and enhance original submissions.