Basel III pre-meeting summary

Following our recent credit analysis on the big western commercial banks, we highlight issues that will be the focus of discussions in Switzerland as the Basel Committee on Banking Supervision (BCBS) meets tomorrow.

The upcoming meeting follows the recently released consultative document entitled “Proposal to ensure the loss absorbency of regulatory capital at the point of non-viability” in August 2010 (which could also impact single-name financial credit default swaps) and last December’s package of proposals to strengthen global capital and liquidity regulations with the goal of promoting a more resilient banking sector in a document entitled “Consultative proposals to strengthen the resilience of the banking sector“.

Bloomberg highlighted a Die Ziet report that the Basel Committee will increase  minimum limit of Tier I capital to 6% plus a 3% “conservation buffer” and another 2.5% “anti-cyclical buffer” which would result in a minimum of 11.5-12% percent capital ratio in ordinary times. Banks may also need to hold 5% common equity. Currently under Basel II, the Tier 1 ratio is 4% with half that ratio needing to be in common stock with no buffers.
Germany & USA

The importance of Basel 3 in global financial markets is exemplified by the continued negotiation amongst central bankers of different countries with regards to specific rules as well as the tussle between regulators and bankers. Germany, for example, wanted exceptions for some smaller banks and a longer time than what was initially proposed to give its state-backed banks ample time to switch from a type of non-voting bank capital currently popular but specific to the country called to more internationally recognized capital types that will qualify under new rules. Germany was ideally looking for a 5-10-year phase-in beginning after 2013 while the USA was looking for minimum capital ratios (pre-buffer) implemented by 2012 with buffers being phased in a few years later.

France & Canada

France has been wanting contingent convertible capital (called “cocos”) to count towards the buffer capital requirements. Canada, whose financial system likely emerged the strongest out of the western world, has disagreed withcapital proposals being premised on a severe stress scenario and does not believe it is appropriate to take a solvency view for capital adequacy purposes with the Canadian Bankers Association (CBA) saying “The objective of capital adequacy should be to ensure that entities are able to withstand stressed environments on a going concern basis.”

Korea

Not everyone is, however, is that concerned – particularly in Asia.  Kim Yong-beom, director general of Seoul’s G20 committee was reported saying that “To the envy of many European and American institutions, Korean banks need not shrink their assets or raise more capital, because they already meet those strict capital-to-asset standards” and thus the higher requirements for the capital base of banks under the so-called Basel III proposition will not affect Korean banks. Korea has been pushing for its own solution to future problems in what is called the Korea Initiative for a Global Financial Safety Net (GFSN).

India

On the other side of Asia, Reserve Bank of India Governor, Duvvuri Subbarao, is already on record saying “Indian banks are not likely to be significantly impacted by the proposed new capital rules [Basel III]” since leverage in the Indian banking system was moderate. Mr. Subbarao’s full speech summarizing Basel 3 proposals from a domestic perspective is available for download here.

For those interested in a short summary about the BCBS meeting, Reuters has a simple Q&A summary of the upcoming BCBS Basel 3 meeting.  The Basel ii Compliance Professionals Association (BCPA) and BiiiCPA also provides a very short summary blog post of their expectations coming out of the meeting.

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