Big Banks Cut Basel Shortfall by $112 Billion at End 2012

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.

“Shortfalls in the risk-based capital of large internationally active banks continue to shrink,” the Basel Committee on Banking Supervision said in a statement on its website. The biggest European lenders account for a large part of the remaining shortfall, according to data published today by the European Banking Authority.

Banks also need to do further work to meet a planned binding limit on indebtedness, known as a leverage ratio, the Basel group said. A quarter of large global lenders failed to meet the standard.

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, will more than triple the core capital that lenders must hold to at least 7 percent of their assets, weighted for risk.

Market Factor

“Although the capital gap may seem to be narrowing, this is only temporary and thus not a meaningful market factor,” said Karen Shaw Petrou, managing partner of Washington-based research firm Federal Financial Analytics Inc.

“The real story” is the Basel committee’s planned leverage ratio, which once finalized could widen banks’ capital shortfalls “very, very dramatically, especially in Europe and Japan,” she said.

Stefan Ingves, the Basel group’s chairman, has said that work on the leverage measure should “be largely completed” this year.

Under the Basel plan, banks will have to begin disclosing how well they measure up to the leverage rule from 2015. The Basel III capital requirements are scheduled to phase in fully by 2019.

The biggest lenders in Europe account for 70.4 billion euros of the capital shortfall at the end of last year identified by the Basel committee, the EBA said in a separate statement today. They boosted their capital levels by 29 billion euros from June 2012, the EBA said.

Capital Gaps

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. The overall capital gap for large global banks narrowed by about 42 percent at the end of 2012 compared with the middle of last year, the Basel group said.

“Although much progress has been made by the banks on satisfying risk-based capital needs, there are still many open questions about the usefulness and reliability of such measures,” Richard Reid, a research fellow for finance and regulation at the University of Dundee in Scotland, said in an e-mail.

“In the near-term, the regulatory and market focus in Europe is probably more on the impending asset-quality review” of lenders by the European Central Bank, Reid said.

Barclays Plc, the U.K.’s second largest bank by assets, announced in July that it plans to raise 5.8 billion pounds ($9.3 billion) in a rights offering to bolster capital, in a bid to respect leverage limits imposed by U.K. regulators.

Deutsche Bank AG, continental Europe’s biggest bank, said in the same month that it would shrink its balance sheet by 250 billion euros as part of its efforts to comply with Basel.

Significant Opportunities

“More recently there has been greater focus on more straightforward measures such as leverage” rather than regular capital requirements, Reid said. “But even here it would seem that there are significant opportunities for forbearance and mitigation.”

Both the EU 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 from next year.

A sample of 222 banks surveyed by the Basel committee, including 101 large international lenders, had a combined shortfall of 563 billion euros in the easy-to-sell assets needed to meet one of the Basel liquidity rules, the group said. The liquidity coverage ratio is also set to fully apply from 2019.

2 Trillion Euros

The sample of banks also had a 2 trillion euro shortfall in the stable funding needed to meet a separate Basel requirement for banks to back long-term lending with funds that are unlikely to dry up in a crisis. This measure, known as a net-stable funding ratio, is under review by the Basel committee, and is scheduled to become a binding requirement on Jan. 1, 2018.

“The liquidity numbers remain daunting, exacerbating my deep fears about a mad scramble in the market for eligible assets,” Petrou said.

The Basel group defines large global banks as those with more than 3 billion euros in Tier 1 capital and which are internationally active.

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.

As lenders bolster their balance sheets, relative yields on bonds from Citigroup Inc. to JPMorgan Chase & Co. fell below the average for industrial notes this month, the first time since September 2007 that investors didn’t require more from bank borrowers, according to Bank of America Merrill Lynch index data.

The relationship reversed after bank bond spreads surged to an unprecedented 365 basis points more than industrials amid the worst financial crisis since the Great Depression.

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