Regulators from 27 nations more than doubled their capital requirements for banks, giving lenders as long as eight years to comply in full, as part of international efforts to prevent future financial crises.
The Basel Committee on Banking Supervision will require lenders to have common equity equal to at least 4.5 percent of assets, weighted according to their risk. Regulators will introduce an additional capital buffer of 2.5 percent to withstand future stress, the committee said in a statement today. Banks that fail to meet that second buffer would be stopped from paying dividends, though not forced to raise cash.
Under political pressure to rein in banks’ risk-taking, regulators have been tightening capital rules and introducing new measures such as liquidity requirements. Lenders have pushed back, lobbying their governments and supervisory bodies to soften the proposed regulations. The new rules and ratios, the strictest since nations began regulating the global banking system together in 1974, will force many lenders to sell new shares, while others will be restricted on how much cash they can return to their shareholders for years to come.
“The agreements reached today are a fundamental strengthening of global capital standards,” European Central Bank President Jean-Claude Trichet said in a statement. “Their contribution to long-term financial stability and growth will be substantial. The transition arrangements will enable banks to meet the new standards while supporting the economic recovery.”
Trichet chairs the board of governors and heads of supervision from the countries that make up the Basel committee. U.S. representatives at today’s meeting included Federal Reserve Chairman Ben Bernanke, New York Fed President William Dudley and Federal Deposit Insurance Corp. Chairman Sheila Bair. U.K. Financial Services Authority Chairman Adair Turner and Bank of England Governor Mervyn King were also in attendance. Axel Weber, president of the German central bank, and Jochen Sanio, the country’s chief bank regulator, were also in Basel.
“Step-by-step, the Basel committee is delivering what it set out to do: change the business model of banking,” said Barbara Matthews, managing director of BCM International Regulatory Analytics LLC in Washington. “Banks -- and their customers -- will have to adjust to this new reality.”
The rule-making process, which began in 2009, has pitted countries against each other. Some, including Germany, have said higher capital requirements will hurt their banks and curb lending at a time when global economic recovery is faltering. Germany led the fight for lower ratios and a slower time frame for implementation, according to participants in the talks.
Tier 1 Ratios
Lenders will also be required to maintain a Tier 1 capital ratio of at least 6 percent, the committee said today. Tier 1, a measure of financial strength, includes common equity and some equity-like debt instruments.
The capital ratios proposed to the committee when it met on Sept. 7 were 5 percent for common equity, with a 2.5 percent buffer for bad times, and 6 percent for Tier 1 with a 3 percent buffer. Under 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.
“The combination of a much stronger definition of capital, higher minimum requirements and the introduction of new capital buffers will ensure that banks are better able to withstand periods of economic and financial stress,” Nout Wellink, Dutch Central Bank president and chairman of the Basel Committee, said in a statement.
Another buffer, which would be required during times of faster credit growth, would be set at as much as 2.5 percent of common equity, the committee said today. The details of how and when that buffer would be employed haven’t been finalized yet. The proposal for the mechanism, the so-called counter-cyclical buffer, was released publicly in July, and banks had until Sept. 10 to submit comments.
Banks will have less than five years to comply with the minimum ratios and until Jan. 1, 2019 to meet the buffer requirements. Member countries will be expected to have adopted the regulations into their individual rule books by January 2013. The U.S., U.K. and Switzerland were insisting on a maximum of five years for transition, while Germany was pushing to extend it to 10 years, four people with knowledge of the talks said last week.
While Germany didn’t get the deadlines extended all the way, it won some concessions for its state-owned banks, which would have a harder time to comply. Government capital injections will continue to count as common equity until the end of 2017, even if they were in a form that the new Basel rules consider as not qualifying. State banks get an extra five years of exemptions to other rules tightening the definition capital.
“The gradual transition phase will allow all banks to fulfill the rising requirements for minimum capital and liquidity,” Weber, who attended today’s meeting, said in a statement. “The unique characteristics of German financial institutions that aren’t stockholder corporations are thus appropriately catered for.”
In an August report studying the economic impact of tighter capital rules, the Basel committee said that four years was the ideal time frame for implementing the new standards.
The Basel committee in previous meetings restricted what can be counted as bank capital, which would reduce current levels by deducting assets included in the calculation, such as mortgage-servicing rights. JPMorgan Chase & Co., the second- largest U.S. bank, said last month that the Basel rules would shave its capital ratio by as much as 2 percentage points.
Bank of America, Citigroup
Of the 24 U.S. banks represented on the KBW Bank Index, seven would fall under the new ratios based on calculations using the revised definitions of capital, Keefe, Bruyette & Woods analyst Frederick Cannon said in a Sept. 10 report. Bank of America Corp. and Citigroup Inc., the nation’s No. 1 and No. 3 lenders, would be among those, Cannon estimates. Bank of America would have to hold off paying dividends or buying back shares until the end of 2013, he said.
European banks are less capitalized than U.S. counterparts and may be required to raise more funds under the new Basel rules. Deutsche Bank AG, Germany’s biggest lender, said today it plans to sell at least 9.8 billion euros ($12.5 billion) of stock. Germany’s 10 biggest banks, including Frankfurt-based Deutsche Bank and Commerzbank AG, may need about 105 billion euros in fresh capital because of new regulations, the Association of German Banks estimated on Sept. 6.
The European Banking Federation, a lobbying group, wrote to Trichet this week, warning once again that tighter rules may limit the amount banks lend to individuals and companies, Italy’s Il Sole 24 Ore reported yesterday.
Today’s agreement fails to address the so-called “too big to fail” challenge posed by banks of excessive size, said Daniel Zuberbuehler, vice-chairman of Switzerland’s Financial Market Supervisory Authority.
“Further efforts on that issue will have to be made at the international and the national levels,” he said in a statement.
With today’s decision, the Basel committee has completed most of its work on a package of reforms it will submit to leaders of the Group of 20 nations who are meeting in November in Seoul.
The committee has yet to agree on revised calculations of risk-weighted assets, which form the denominator of the capital ratios to be determined this weekend. The implementation details of a short-term liquidity ratio will also be decided by the time G-20 leaders meet, members say. A separate long-term liquidity rule will likely be left to next year.
The two liquidity rules would require banks to hold enough cash and easily cashable assets to meet short-term and long-term liabilities. The long-term requirement has been criticized the most by the banking industry, which claims it would force banks to sell $4 trillion of new debt.
The Basel committee has another meeting scheduled for Sept. 21-22 and said it may gather in October to finish its work.