Growing Banks Hold Onto Profit to Meet Capital Targets, BIS Says

Lenders are meeting regulators’ demands to increase capital by holding onto profits rather than curbing lending, according to a report by the Bank for International Settlements.

Banks increased capital ratios to an average of 8.5 percent at the end of June 2012 from 5.7 percent at the end of 2009, the BIS wrote in a quarterly review published today. Leverage ratios, which measure equity capital as a proportion of total assets, rose to 3.7 percent from 2.8 percent over the period. Most of the increase came from banks reducing dividends and widening lending spreads, said the BIS, a group of regulators and central bankers that sets global capital standards.

“In the years since the crisis, both private and public sectors have exerted pressure on banks to build large buffers of high-quality capital,” BIS economist Benjamin Cohen said in the report. “The bulk of that adjustment has taken place through the accumulation of retained earnings, rather than through sharp adjustments in lending or asset growth.”

Banks were ordered by the Basel Committee on Banking Supervision to more than double their capital ratios, a measure of capital to risk-weighted assets, after Lehman Brothers Holdings Inc. collapsed five years ago. Policy makers were concerned banks would meet the standards by cutting lending rather than raising capital, stalling an economic recovery.

Lending Increases

In fact, lending increased across the 82 banks examined in the report. From 2009 to 2012 total assets jumped by 8 percent at lenders in developed economies and 47 percent among those in emerging economies, the BIS found.

That was offset by a cut in the dividend payout ratio to 27 percent in the period 2010 to 2012 from 40 percent in 2005 to 2007, the BIS reported. Lending spreads also rose, boosting retained earnings. Net interest income, the interest banks receive on loans and investments minus what they pay for deposits, increased to 1.62 percent of assets from 1.34 percent.

“Banks in aggregate do not appear to have cut back sharply on asset or lending growth as a consequence of stronger capital standards,” Cohen wrote. “Banks in emerging markets also benefited from a period of higher earnings and asset growth.”

To contact the reporter on this story: Liam Vaughan in London at lvaughan6@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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