Basel Boosts Bank Capital Ratios; Firms Get Till 2018 to Comply Yalman OnaranSep 12, 2010 2:19 pm ET Sept. 12 (Bloomberg) -- Regulators from 27 nations more than doubled banks’ capital ratios and gave lenders as much as eight years to comply in full as part of international efforts to prevent future financial crises. The Basel Committee on Banking Supervision’s main governing body, meeting today in Basel, Switzerland, said banks worldwide need to have common equity equal to at least 4.5 percent of assets, weighted according to their risk profiles. Regulators will introduce a further 2.5 percent buffer. Banks that fail to meet that buffer would be stopped from paying dividends, though not forced to raise cash, the committee said in a statement. Under political pressure to rein in banks’ risk-taking, regulators have been tightening capital rules and introducing new measures such as liquidity requirements. Lenders have pushed back, lobbying their governments and supervisory bodies to soften the proposed regulations. The new rules and ratios, the strictest since nations began regulating the global banking system together in 1974, will force many lenders to sell new shares, while others will be restricted on how much cash they can return to their shareholders for years to come. “Step-by-step, the Basel committee is delivering what it set out to do: change the business model of banking,” said Barbara Matthews, managing director of BCM International Regulatory Analytics LLC in Washington. “Banks -- and their customers -- will have to adjust to this new reality.” Trichet, King European Central Bank President Jean-Claude Trichet chairs the board of governors and heads of supervision from the countries that make up the Basel committee. U.S. representatives at today’s meeting included Federal Reserve Chairman Ben Bernanke, New York Fed President William Dudley and Federal Deposit Insurance Corp. Chairman Sheila Bair. U.K. Financial Services Authority Chairman Adair Turner and Bank of England Governor Mervyn King were also in attendance. Axel Weber, president of the German central bank, and Jochen Sanio, the country’s chief bank regulator, were also in Basel. The rule-making process, which began in 2009, has pitted countries against each other. Some, including Germany, have said higher capital requirements will hurt their banks and curb lending at a time when global economic recovery is faltering. Germany led the fight for lower ratios and a slower time frame for implementation, according to participants in the talks. Lenders will also be required to maintain a Tier 1 capital Ratio, of at least 6 percent, the committee said today. Tier 1, a measure of financial strength, includes common equity and some equity-like debt instruments. September Proposals The capital ratios proposed to the committee when it met on Sept. 7 were 5 percent for common equity, with a 2.5 percent buffer for bad times, and 6 percent for Tier 1 with a 3 percent buffer. Under current Basel rules, the Tier 1 requirement is 4 percent. Half of that, or 2 percent, needs to be common stock. There’s no buffer requirement. Banks will have five years to comply with the minimum ratios and three more years to meet buffer requirements. The clock starts ticking in January 2013 when member countries will be expected to have adopted the regulations into their individual rule books. The U.S., U.K. and Switzerland were insisting on a maximum of five years for transition, while Germany was pushing to extend it to 10 years, four people with knowledge of the talks said last week. In an August report studying the economic impact of tighter capital rules, the Basel committee said that four years was the ideal time frame for implementing the new standards. Defining Capital The Basel committee in previous meetings restricted what can be counted as bank capital, which would reduce current levels by deducting assets included in the calculation, such as mortgage-servicing rights. JPMorgan Chase & Co., the second- largest U.S. bank, said last month that the Basel rules would shave its capital ratio by as much as 2 percentage points. Of the 24 U.S. banks represented on the KBW Bank Index, seven would fall under the new ratios based on calculations using the revised definitions of capital, Keefe, Bruyette & Woods analyst Frederick Cannon said in a Sept. 10 report. Bank of America Corp. and Citigroup Inc., the nation’s No. 1 and No. 3 lenders, would be among those, Cannon estimates. Bank of America would have to hold off paying dividends or buying back shares until the end of 2013, he said. European banks are less capitalized than U.S. counterparts and may be required to raise more funds under the new Basel rules. Deutsche Bank AG, Germany’s biggest lender, said today it plans to sell at least 9.8 billion euros (.5 billion) of stock. Germany’s 10 biggest banks, including Frankfurt-based Deutsche Bank and Commerzbank AG, may need about 105 billion euros in fresh capital because of new regulations, the Association of German Banks estimated on Sept. 6. Lobbying Efforts The European Banking Federation, a lobbying group, wrote to Trichet this week warning once again that tighter rules may limit the amount banks lend to individuals and companies, Italy’s Il Sole 24 Ore reported yesterday. The two biggest Swiss banks, UBS AG and Credit Suisse Group AG, will be affected by the new rules, while smaller lenders in the country probably won’t be hurt at all, Daniel Zuberbuehler, vice chairman of the nation’s Financial Market Supervisory Authority, said on Sept. 9. “If people don’t like the impact, you can get out of the business,” Zuberbuehler said. With today’s decision, the Basel committee has completed most of its work on a package of reforms it will submit to leaders of the Group of 20 nations who are meeting in November in Seoul. Risk-Weighted Assets The committee has yet to agree on revised calculations of risk-weighted assets, which form the denominator of the capital ratios to be determined this weekend. The implementation details of a short-term liquidity ratio will also be decided by the time G-20 leaders meet, members say. A separate long-term liquidity rule will likely be left to next year. The two liquidity rules would require banks to hold enough cash and easily cashable assets to meet short-term and long-term liabilities. The long-term requirement has been criticized the most by the banking industry, which claims it would force banks to sell trillion of new debt. The Basel committee has another meeting scheduled for Sept. 21-22 and said it may gather in October to finish its work. --With assistance by Christian Vits, Klaus Wille and Jana Randow in Basel, and Elisa Martinuzzi in Milan. Editors: Robert Friedman, Edward Evans.
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