Basel Capital Ratio Compromise Reached, Zeitler Says

Global regulators reached a compromise on capital ratios for banks that will introduce higher capital requirements over a five- to 10-year period starting in 2013, a German central bank official said.

The Basel Committee on Banking Supervision drafted key points of the so-called Basel III reforms, Bundesbank Vice President Franz-Christoph Zeitler told reporters in Frankfurt today. The proposal will be the basis for the Sept. 12 meeting of the Group of Governors of Central Banks and Heads of Banking Supervision Authorities who will decide on the reform framework.

Policy makers are seeking to raise the quality and quantity of reserves held by banks to avoid another financial crisis. Germany has been the lone holdout in the talks since July, concerned that its banks wouldn’t be able to bear the burden of tougher capital requirements. Agreeing on capital ratios will allow the Basel committee to complete two-thirds of its work on a package of reforms, with some decisions left to next month and some delayed until next year.

“They’re almost there, but there are still things up in the air,” said Frederick Cannon, chief equity strategist at New York-based Keefe, Bruyette & Woods. “The numbers that have been leaked are roughly in line with expectations. I don’t see huge negative news for banks.”

‘Conservation Buffer’

Die Zeit newspaper reported Sept. 6 that the Basel Committee met to discuss a proposal demanding a minimum Tier 1 capital ratio for financial institutions of 6 percent as well as a “conservation buffer” of 3 percent for bad times. The newspaper also said that banks would be required to hold 5 percent common equity and a buffer of 2.5 percent of that. Tier 1 includes common equity and some equity-like debt instruments. The committee has restricted what’s allowed as Tier 1.

“As to the level of capital ratios, the committee has found a compromise as compared to the proposal,” Zeitler said. He didn’t reveal any numbers.

Under the current Basel rules, the Tier 1 requirement is 4 percent. Half of that, or 2 percent, needs to be common stock. There’s no buffer requirement. KBW’s Cannon said he was expecting the committee to set an 8 percent Tier 1 common rule, including the buffer.

‘Completely Manageable’

The new 6 percent ratio would be “completely manageable,” Societe Generale SA Deputy Chief Executive Officer Severin Cabannes said today at a conference in Frankfurt.

“Standing still is not going to be an option,” said Morgan Stanley CEO James Gorman, 52, speaking at the same conference.

While banks will be forced to raise capital to comply with the 5 percent common equity minimum, they won’t have to do so to be within the buffer. Falling below the buffer’s upper range means a bank can’t pay out dividends or buy back shares until it gets to that threshold, according to the new Basel rules.

“Some banks will be able to resume paying dividends soon, but for many it will be several years before they can comply with the buffers,” said Cannon.

Banks have attacked the rules, saying they will hurt economic growth as lending is curtailed.

Paul Donovan, deputy head of global economics at UBS AG, said at a conference in Moscow today that the new rules were “disastrous.” Germany’s savings banks may have to cut lending by a triple-digit billion-euro amount, said Heinrich Haasis, president of a group representing such lenders. UniCredit SpA Chief Executive Officer Alessandro Profumo said increased regulation will hurt profitability.

November in Seoul

The Basel III reforms aim to make banks worldwide more resilient in light of the experiences during the financial crisis. Group of 20 leaders meet in November in Seoul to approve the rules. The Basel committee has said it may hold a meeting in October to finish its work before Seoul.

European Central Bank Governing Council member Axel Weber today said higher capital requirements for banks won’t curb economic expansion, echoing the findings of a report released last month by the Basel Committee.

“The path we walk on isn’t too risky,” Weber said in a speech in Frankfurt today. “We don’t have to expect that the planned increase in capital ratios will hamper the real economy, in particular given generous transition periods.”

Weber, who is also president of Germany’s Bundesbank, said that while “not everyone will be able to push through their national position,” he is “confident” the proposals will be concluded this weekend.

U.S. Implementation

He said he wants the U.S. to follow through on implementation of the agreement. “It can’t be that we’ll implement Basel in Europe and not in the U.S.,” he said.

Germany declined in July to sign a preliminary agreement on the rules at a meeting of central bankers and supervisors at the Bank for International Settlements in Basel, Switzerland, reserving its position until the decisions on calibration and phase-in arrangements are completed.

The Basel committee, which represents central banks and regulators in 27 nations and sets capital standards for banks worldwide, was asked by leaders from the G-20 nations to draft new rules after the financial crisis triggered the deepest global recession since the Great Depression.

In July, the panel softened some of its proposed capital and liquidity rules while introducing new restrictions on how much lenders can borrow as part of an effort to rein in their risk-taking.

Binding by 2018

It agreed to allow certain assets, including minority stakes in other financial firms, to count as capital and set a leverage ratio to apply to banks globally for the first time. The rule could become binding by 2018, pending further adjustments to the method of calculating banks’ assets.

The committee this week agreed on the timeframe for when the new capital ratios would be binding on the banks, according to a committee member, who wouldn’t say what that was. Germany was pushing for 10 years for most of the rules’ implementation while the U.S. was trying to cap the transition periods at five years. The compromise time frame lies in between the two extremes, the committee member said.

At its meeting yesterday, the Basel Committee didn’t discuss new liquidity rules, including the question of whether public bonds and high quality assets can count as liquidity, Germany’s Zeitler said today. At least part of the liquidity proposals will be decided next year, committee members have said. The committee is expected to finalize by November the revised calculations of risk-weighted assets, which form the denominator of the capital ratios.

To contact the reporters on this story: Yalman Onaran in New York at yonaran@bloomberg.net; Karin Matussek in Berlin at kmatussek@bloomberg.net; Jana Randow in Frankfurt at jrandow@bloomberg.net.

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