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Biggest Banks Seen Meeting Basel Rules Five Years Ahead of Time

The world’s biggest banks exceed or comply with capital levels under regulators’ Basel 3 proposals five years before deadline, according to Fitch Ratings.

The average ratio of capital to assets weighted by risk is 10.1 percent at 29 global systemically important banks, compared with the average minimum requirement of 8.4 percent, Fitch analysts led by Martin Hansen in New York wrote in a report.

“There’s a sort of arms race going on,” said Steve Hussey, who helps manage about $445 billion as financials analyst at AllianceBernstein Ltd. in London. “The stronger banks put on the extra capital required as soon as possible. They don’t want to get left behind.”

Regulators worldwide forced banks to fund more of their businesses with capital after the taxpayer-funded bailouts in the wake of the 2008 financial crisis. While equity remains the first line of defense against losses, lenders have begun to issue new types of debt securities designed to be impaired should the bank get into trouble.

The average yield investors demand to hold global bank bonds dropped to 2.4 percent this week from a record 8.2 percent at the height of the credit crisis in 2009, according to Bank of America Merrill Lynch index data.

Yields on new-style contingent capital bonds declined 10 basis points this month to 6.78 percent, after dropping as low as 6.69 percent on Jan. 20, according to index data compiled by Bank of America Merrill Lynch, which the bank started compiling this year.

Capital Requirements

A group of financial institutions is designated systemically important by the Financial Stability Board each year, imposing extra capital requirements of as much as 3.5 percent. The biggest charge at present is 2.5 percent on HSBC Holdings Plc (HSBA) and JPMorgan Chase & Co.

Skepticism about risk weightings has prompted regulators to look more closely at the ratio between total assets and capital, a move that may force the banks to raise more equity, Fitch said.

“Basel 3 makes the banking system more robust, but there could be unintended consequences,” Fitch’s Hansen said in a telephone interview. “There could be a reduction in credit availability and liquidity if the banks step back.”

To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net

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