By Central Bank News
Major banks have made major progress in thickening their capital cushion to prepare for the new tougher Basel III rules but they were still short of up to 374 billion euros by the end of 2011.
In order for all the 102 largest banks to reach a 4.5 percent minimum level of capital to risk-weighted assets, an additional 11.9 billion euros is needed, the Basel Committee on Banking Supervision said in its latest study of the impact of the new, more stringent rules.
To reach Basel III’s target of a 7.0 percent capital ratio, which includes a surcharge for globally systemic important banks and a capital conservation buffer, the largest banks have to put aside an additional 374.1 billion euros, more than their combined 2011 net profits of 356 billion euros.
In comparison to the previous study from April, the Basel Committee of global bank regulators found that largest banks had reduced the total shortfall by 111.5 billion euros.
A total of 209 banks participated in the impact study, which assumes full implementation as of December 31, 2011, and doesn’t take account of how each country is phasing in Basel III.
For the 102 largest banks, the so-called Group 1 banks that are either internationally active or have capital over 3 billion euros, the study found an average Tier 1 capital ratio of 7.7 percent, well above the minimum.
For Group 2 banks, which includes all other major banks, the average Tier 1 ratio was 8.8 percent. For all the Group 2 banks to meet the 7.0 percent target, an additional capital of 21.7 billion euros is required, below their combined profits of 24 billion euros, the Basel Committee said in a statement.
The Basel Committee also estimated the impact of the new liquidity standards, which European Central Bank President Mario Draghi has criticized for penalizing interbank lending.
The liquidity standard was introduced in the Basel III rules to ensure that banks had enough assets that could be sold easily so they could survive a freezing up of credit markets, as happened in 2008.
Assuming that banks made no changes to their liquidity risk profile or funding structure as of December 2011, the Basel Committee said the weighted average Liquidity Coverage Ratio (LCR) for Group 1 banks would have been 91 percent, up from 90 percent in the previous study that was based on data as of June 30, 2011.
For Group 2 banks, the average LCR was 98 percent. The Committee did not provide a comparison figure, not actual estimates of what the shortfall was in euros.
The Committee repeated that it is considering modifying some aspects of LCR, but it “will not materially change the framework’s underlying approach.
The ECB has asked the Basel Committee to expand the type of assets that banks can use to meet the liquidity requirements.
The liquidity rules were published in December 2010 but the Basel Committee is taking a very careful approach to make sure there are no unintended consequences.
But Stefan Ingves, chairman of the Basel Committee, last week acknowledged that some banks had said this careful approach had triggered uncertainty and hindered work toward meeting the standards.
The Basel Committee plans to finalize its recommendations for the liquidity rules around the end of this year, but Ingves not the goal of the rules was to raise the bar for banks.
“It is designed to have an impact on banks and markets: that is not unintended,” he said.
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