Basel bank regulators said rules on capital requirements would have cost financial institutions 602 billion euros ($797 billion) had they been in place at the end of last year.
Banks also would have had shortfalls including a 2.89 trillion-euro gap in stable funding, necessary to meet separate liquidity requirements, the Basel Committee on Banking Supervision said. The committee agreed in July to phase in the capital and liquidity rules by 2019 in a bid to mitigate their effect on lenders emerging from the credit crisis.
Regulators are overhauling bank capital and liquidity requirements because existing rules, known as Basel II, failed to protect lenders from insolvency during the financial crisis. The main elements of the overhaul were approved by leaders of the Group of 20 countries last month.
Meeting the Basel rules “will cost banks a lot of money, but there’s no alternative,” Konrad Becker, a banking analyst at Merck Finck & Co. in Munich, said by telephone today. “The question is how to do: with retained earnings, selling assets, capital increases or lower dividends.”
The Basel committee said the 602 billion euros would have been needed for banks to cope with a requirement to hold core capital equivalent to 7 percent of their assets, with these assets weighted according to their riskiness. The figure was calculated by regulators based on data collected from 263 banks. Transition Period
“The transition period provides banks with ample time to move to the new standards in a manner consistent with a sound economic recovery,” Nout Wellink, the chairman of the Basel committee, said in a statement on the group’s website.
So-called internationally active banks, with more than 3 billion euros in Tier 1 capital, a broader measure of banks’ reserves, would have needed an additional 577 billion euros of core capital to satisfy the rules, while other banks surveyed would have needed 25 billion euros, the Basel committee said.
The 2.89 trillion-euro gap is the group’s calculation of banks’ liquidity shortfall against a so-called net stable funding ratio. That ratio, scheduled to be put in place in 2018, aims to limit the mismatch between the duration of loans and deposits, to ensure that banks don’t face cash flow shortages.
Liquidity Coverage
Lenders at the end of 2009 would also have had a shortfall of 1.73 trillion euros in the assets necessary to meet a separate liquidity coverage ratio, which will measure banks’ ability to survive a 30-day credit crunch. That ratio is scheduled to be effective from 2015.
Banks that fail the minimum liquidity requirements could meet them by “lengthening the term of their funding or restructuring business models,” the Basel committee said. “The actual impact” of the new Basel requirements “by the time they are implemented will likely be lower as the banking sector adjusts to a changing economic and regulatory environment,” the committee said in its impact report.
The results “do not consider banks’ profitability or make any assumptions about banks’ behavioral responses,” the report said. “The estimates presented assume full implementation of the Basel III package, based on data as of year-end 2009.”
No ‘Extreme Danger’
“I don’t see an extreme danger for economic growth and the long transition period to 2019 should reduce such risks,” Becker said. “The new standards are doable and sensible. Making the banking system more stable and safe doesn’t come without costs. You can’t do the one without the other.”
Nomura Holdings Inc. analysts led by Jon Peace wrote in a report to clients today before the Basel report was published that they expect banks will meet the demands of the new rules by retaining earnings rather than selling shares.
“We do not predict a flood of equity issuance to comply with Basel III,” they said.
Banks based in the 27-nation European Union would have needed 263 billion euros of additional core capital to meet the seven percent threshold agreed by Basel regulators, the Committee of European Banking Supervisors, which collected data from its lenders for the Basel impact study, said. The CEBS figures are based on data from 246 banks based in the EU.
Italian banks would have needed 47 billion euros of additional capital to meet the Basel requirements at the end of 2009, and 40 billion euros as of June, the Bank of Italy said in a statement today.
The Basel committee today published a so-called rules text clarifying the details of the regulatory overhaul. As well as revised rules on capital and liquidity, the plans also include a limit on banks’ borrowings.
Few Surprises “There are few surprises here, but some important details,” analysts at Credit Suisse Group AG said about the Basel rules text.
Changes to one of the two liquidity ratios planned by Basel regulators would “benefit Nordic and other retail banks” by accepting that covered bonds are more liquid than previously thought, the Credit Suisse analysts wrote in an e-mailed statement.
The Basel group also published proposals for national authorities on countercyclical capital buffers, aimed at bolstering capital during credit booms.
Under the plan, banks would hold extra capital during credit booms with the aim both of mitigating them and of ensuring than banks are well capitalized for any ensuing market crash.
The Basel committee brings together regulators from 27 countries including Brazil, China, India, Germany the U.K. and the U.S.
To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net.
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