S&P Concerned Global Consensus Fraying on Banks’ Capital

Standard & Poor’s said it sees “worrisome cracks” in a global push to strengthen banks’ capital with the world’s largest lenders unlikely to make big improvements.

“Events in the past six months illustrate that the consensus on bank capitalization is starting to fray,” the ratings company said in a report today. “Some national regulators are satisfied with Basel III targets, and believe that even tighter bank capitalization could backfire and cause economic damage. Others believe that banks can become more active in financing the economy once they are healthy enough to regain full access to the wholesale funding markets.”

While more than half of the banks S&P rates had increased capital ratios by the end of 2012 from a year earlier, the improvement was heavily influenced by credit growth and earnings. Lenders remained reluctant to raise equity, the ratings company said, citing its latest survey of the world’s top 100 lenders. The quality of capital may also decline as regulators allow banks to raise “weaker” hybrid capital to fulfill requirements, it said.

“In view of these worrisome cracks in the Basel III consensus, we expect differences about capital standards and stances to widen over the coming quarters,” Arnaud de Toytot, an S&P analyst, said in the statement. “This is likely to make capital a greater source of differentiation for our ratings on banks than it has been over the past few years.”

Missing Deadline

Banks have been forced by global regulators to meet stricter rules under Basel III, a set of measures designed to improve risk management and regulation of the industry. Banks can plug gaps in capital by retaining earnings, issuing more securities eligible to count as capital or by reducing their assets weighted for risk.

Both the European Union and the U.S. missed a January 2013 deadline to begin phasing in the Basel standards on capital, and have said they will start the process next year. The U.S., U.K., Sweden and Switzerland are among nations that have promised to set tougher rules for their banks than required by Basel.

The largest global banks cut the shortfall in the reserves they’ll need to meet Basel capital rules by 82.9 billion euros ($112 billion) in the second half of 2012, leaving a gap of 115 billion euros, the Basel Committee on Banking Supervision said last month. The biggest European lenders accounted for 70.4 billion euros of the capital shortfall at the end of last year identified by the Basel committee, according to data published by the European Banking Authority.

‘Troubled Markets’

S&P analyzed banks’ capital strength according to its own risk adjustments, which seek to iron out inconsistencies in how national regulators treat reserves and risks.

About 40 percent of the banks examined had risk-adjusted capital ratios below 7 percent, which the rating company sees as the minimum threshold for assessing capital as adequate, with the lowest capital ratios concentrated in “troubled markets” such as Spain and Ireland, S&P said. The number of banks with ratios above 10 percent has fallen to six at the end of 2012 from 10 at the end of 2010, it added.

The rating company said it expects about 13 percent of the top 100 banks to have a higher risk-adjusted capital ratio for the current and subsequent years than at the end of 2012. A growing number of banks indicated last year that they were compliant with the core equity requirements under Basel III or will be by year-end 2013, leading to less pressure on lenders to accumulate more capital, S&P said.

Debt Crisis

“Any assessment of capital should also adequately recognize and measure the risk,” S&P said. “There are growing concerns in the market that some banks -- especially in some European countries -- have been slow to recognize nonperforming loans, revalue collateral, and book impairments to protect capital and profitability by spreading losses over an extended period.”

In a separate report, S&P said today that it would be premature to assume that the euro region’s crisis is nearing an end. In both the public and private sectors, most of the deleveraging effort still lies ahead, it said.

To contact the reporter on this story: Elena Logutenkova in Zurich at elogutenkova@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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