Basel III – Some Details

The minimum capital requirements, as detailed in 12th September 2010 announcement are as under:

  • Increasing the minimum common equity requirement from 2% to 4.5% of Risk Weighted Assets (RWA). This will be phased in by 1st January 2015.
  • The Tier 1 Capital Requirement, which includes common equity and other qualifying financial instruments based on stricter criteria, will increase from 4% to 6% over the same period.
  • In addition, banks will be required to hold a capital conservation buffer of 2.5% to withstand future periods of stress bringing the total common equity requirements to 7% of RWA.
  • The purpose of the conservation buffer is to ensure that banks maintain a buffer of capital that can be used to absorb losses during the periods of financial and economic stress.
  • A countercyclical buffer within a range of 0% – 2.5% of common equity or other fully loss absorbing capital will be implemented according to national circumstances.
  • The purpose of the countercyclical buffer is to achieve a broader macroprudential goal of protecting the banking sector from periods of excess aggregate credit growth.
  • The Minimum Capital Adequacy Ratios are as under: Core Tier 1: 7% (including a 2.5% capital conservation buffer), Tier 1: 8.5% (including a 2.5% capital conservation buffer), Total: 10.5% (including a 2.5% capital conservation buffer) 

The standards could have broad implications for the amount and cost of credit available around the world, as banks adjust their balance sheets and business plans to comply. Banks will have two years to meet the basic requirements proposed by the committee, though some of its provisions will not be implemented for up to eight years.
The new rules, agreed to by major Global Regulators on Sunday, 12th September 2010, would make banks roughly double the amount of capital set aside as a buffer against possible losses, slash stockholder dividends and executive pay if that stockpile falls short, and limit lending during economic boom times. Combined, those measures are intended to shape the behavior of bank managers and investors in unexplored ways – trying, for example, to have them curb lending in good times in the hope that asset bubbles won’t give way to a costly bust.
The agreement settles one of the key outstanding issues in the world’s response to the recent crisis.
Some financial industry analysts and groups have argued that the stricter standards would slow lending and economic growth. In a statement released after the meeting, the committee acknowledged that the new requirements would force banks, particularly the world’s larger ones, to raise a “significant amount of additional capital.” But they said the increased stability of the entire system would be worth any short-term crimp in lending.
Jean-Claude Trichet, head of the European Central Bank and chairman of the committee of central bankers and regulators that approved the new standards, said the proposals “are a fundamental strengthening of global capital standards. . . . Their contribution to long-term financial stability and growth will be substantial. The transition arrangements will enable banks to meet the new standards while supporting the economic recovery.”
Major U.S. bank regulatory agencies, including the Federal Reserve, endorsed the changes in a press release Sunday afternoon.
U.S. Treasury Secretary Timothy F. Geithner said the Treasury welcomed the group’s work and would begin reviewing the details. Geithner has often endorsed higher capital standards as central to a stronger financial system.

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