Big Banks Needed 485.6 Billion Euros for Basel Capital Rule

The largest global banks would have needed an extra 485.6 billion euros ($639.5 billion) in their core reserves to meet Basel capital rules had the standards been enforced last June.

The 212 lenders surveyed would have needed to find a combined 1.76 trillion euros in easy-to-sell assets to meet a minimum liquidity rule set by the Basel Committee on Banking Supervision, the group said today in a statement on its website. The measures are scheduled to be phased in by 2019.

Global regulators have clashed with lenders over the severity of the capital and liquidity rules, which were set out in 2010 as part of an overhaul of banking regulation in the wake of the financial crisis that followed the collapse of Lehman Brothers Holdings Inc. (LEH) The measures, known as Basel III, will more than triple the core capital that lenders must hold to at least 7 percent of their assets, weighted for risk.

“The new Basel rules mean banks will have to make tough decisions about which businesses they are in, as the capital build needed is massive,” Huw van Steenis, a banking analyst at Morgan Stanley (MS), said in an e-mail.

The Basel Committee’s survey covered 103 larger banks with international businesses and reserves in excess of 3 billion euros, and 109 smaller lenders.

Capital Shortfall

The 485.6 billion-euro capital shortfall for larger lenders takes into account the reserves that lenders would need to raise to meet the 7 percent rule, as well as capital surcharges that the committee said last year would be imposed on lenders whose failure would roil the global economy.

The smaller banks’ capital shortfall was 32.4 billion euros, the Basel group said.

“Not only will dividends be limited for many banks as they build capital, but more and more business will shift from banks to the markets,” van Steenis said.

The results don’t factor in changes lenders might make to their business strategies to reduce the amount of capital they have to raise, the Basel group said. This means that the findings are “not comparable to industry estimates.”

This “somewhat undermines the usefulness of the results,” Richard Reid, research director for the International Centre for Financial Regulation, said in an e-mail. “They key to all these regulations is their practical implementation.”

Liquidity Rule

The Basel liquidity rule would require banks to hold enough easy-to-sell assets to survive a 30-day credit squeeze. The larger banks were, on average, 90 percent of the way toward meeting the rule, while smaller banks were 83 percent of the way there, the group said. The 1.76 trillion-euro shortfall covers both larger and smaller lenders.

The Association for Financial Markets in Europe, which represents international banks including Deutsche Bank AG (DBK), BNP Paribas SA (BNP) and UBS AG, has said that the measure, known as a liquidity coverage ratio or LCR, may make it harder for lenders to spread risks, leaving them more vulnerable in a crisis and forcing them to curb some lending.

The Basel committee has set itself a June deadline to amend parts of the LCR to address unintended consequences, according to two people familiar with discussions the group had last month. The rule is scheduled to become effective in 2015.

While the liquid assets rule is “under investigation” by regulators, its “underlying approach” won’t change, the group said in today’s statement.

Regulators are also reviewing another rule agreed on by the committee as part of Basel III. This requirement, known as a net stable funding ratio, or NSFR, would force lenders to fund long- term loans from sources that are unlikely to dry up in a crisis -- such as term deposits.

Lenders had a 2.78 trillion-euro shortfall in the funds needed to meet the NSFR, which isn’t scheduled to enter into force until 2018, the committee said.

The shortfalls for the two liquidity rules can’t be combined, the Basel group said, as action to address one may also address the other.

To contact the reporters on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net.

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net.

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