Breaking News

Tweet TWEET

Big Banks Halved Basel Capital Gap in First 6 Months of 2013

Photographer: Tomohiro Ohsumi/Bloomberg

Global regulators have clashed with lenders over the severity of capital, indebtedness and liquidity rules, which were set out in 2010 as part of an overhaul of banking regulation to avoid a repeat of the financial crisis that followed the collapse of Lehman Brothers Holdings Inc. Close

Global regulators have clashed with lenders over the severity of capital, indebtedness... Read More

Close
Open
Photographer: Tomohiro Ohsumi/Bloomberg

Global regulators have clashed with lenders over the severity of capital, indebtedness and liquidity rules, which were set out in 2010 as part of an overhaul of banking regulation to avoid a repeat of the financial crisis that followed the collapse of Lehman Brothers Holdings Inc.

The largest global banks halved the shortfall in the capital they will need to meet Basel rules in the first six months of 2013, leaving a gap of 57.5 billion euros ($79 billion).

“Shortfalls in the risk-based capital of large internationally active banks generally continue to shrink,” the Basel Committee on Banking Supervision said in a statement on its website. The figures take into account capital surcharges set to be imposed on international lenders labeled as too big to fail. Large European banks account for 36.3 billion of the capital gap, according to data published today by the European Banking Authority.

Banks also need to do more to meet a planned binding limit on indebtedness, or leverage ratio, with almost 19 percent of a sample of 101 large global lenders failing to meet the standard at June 2013, according to the Basel committee.

Global regulators have clashed with lenders over the severity of capital, indebtedness and liquidity rules, which were set out in 2010 as part of an overhaul of banking regulation to avoid a repeat of the financial crisis that followed the collapse of Lehman Brothers Holdings Inc.

The measures, known as Basel III, more than triple the core capital that lenders must have to at least 7 percent of their assets, weighted for risk.

Sustained Process

“While it’s encouraging to see the improvements in banks’ capital positions, it has to be remembered that one of the reasons for this is the sustained process of deleveraging that has been taking place,” Richard Reid, a research fellow for finance and regulation at Scotland’s University of Dundee, said in an e-mail.

“It remains the case that the supply of credit in a number of economies and especially in the euro zone, continues to be quite tight,” Reid said. This situation is likely to persist for some time yet and will therefore go on hampering economic growth.’’

Banks can plug gaps in capital by either boosting their retained earnings, issuing more securities eligible to count as capital or by reducing their assets weighted for risk.

Under the Basel plan, banks will have to begin disclosing how well they measure up to the leverage ratio from 2015.

While the standard Basel 7 percent rule must be met with common equity core Tier 1 capital, the toughest and narrowest definition of eligible securities, the leverage ratio uses Tier 1, a broader measure.

Basel Requirements

It also differs from normal Basel requirements by denying banks any scope to take into account the riskiness of their assets when working out their capital needs.

The Basel group has said that the leverage ratio target, set at 3 percent of a bank’s assets, should act as a backstop to prevent lenders’ capital levels from falling too low.

Assuming the whole sample of international lenders met other Tier 1 capital requirements, they would still need a further 56.8 billion euros to meet the leverage ratio, the Basel group said.

Still, for “close to three-quarters” of banks assessed by the Basel committee, their normal capital requirements would be higher than the leverage ratio, it said.

The Basel figures on bank’s ability to meet the leverage rule are based on “approximations” of the impact of revisions published by the committee in January, and should be seen as conservative, the group said.

Safety Net

“We need a strong safety net in case risk may be underestimated,” Stefan Ingves, the Basel committee’s chairman, said in a speech last month. “The Basel III leverage ratio provides that.”

The Basel III basic capital requirements are scheduled to phase in fully by 2019.

The group also said that the banks would have needed an extra 536 billion euros in easy-to-sell assets to fully comply with a planned liquidity rule, had it in been in force at the end of June 2013.

That measure, known as the liquidity coverage ratio or LCR, will start to be phased in next year and will fully apply from 2019. Banks had a collective shortfall of 168 billion euros in the easy-to-sell assets needed to comply with the version of the rule that will be in force next year.

A total of 227 banks participated in the Basel study, including 102 large global banks -- defined as those that are internationally active and have Tier 1 capital of more than 3 billion euros. Not all the banks participated in every part of the survey.

To contact the reporter 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

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.