Banks Should Seek to Boost Capital Levels Before Basel Deadlines, BIS Says

blackrock

By Jim Brunsden - Jun 26, 2011 3:01 PM PT

The Bank for International Settlements in Basel, Switzerland. Photographer: Adrian Moser/Bloomberg
Banks should be pushed to meet the higher capital requirements before a series of deadlines starting in 2013, unless earlier introduction of the rules would threaten lending, the Bank for International Settlements said.
The Basel Committee on Banking Supervision’s requirements, which will more than triple the core reserves that banks must hold to protect themselves from insolvency, are “the core regulatory response to problems revealed by the financial crisis,” the BIS said in its annual report. The stance of the group that acts as a bank for central banks echoes comments by Mervyn King, governor of the Bank of England, that U.K. lenders can “do more than just follow” the timetable for meeting the standards.
“Countries should move faster if their banks are profitable and are able to apply the standards without having to restrict credit,” the Basel, Switzerland-based BIS said. National regulators should treat the rules, known as Basel III, as a “minimum” standard that they can surpass if they wish.
Global central bank governors agreed this weekend on extra capital rules for banks whose size or systemic importance means their failure could cause another financial crisis -- a narrower set of institutions than those that will have to comply with Basel III. Regulators agreed that as many as 30 of the world’s largest lenders should face surcharges that range from 1 percentage point to as much as 2.5 percentage points of core capital to prevent them from causing another financial crisis.
The Basel III capital rules are scheduled to be phased in from 2013 through 2019. The BIS is the parent organization of both the Basel committee and the Group of Governors and Heads of Supervision, which oversees the committee’s work.
‘Slightly Ahead’
Under Basel III, banks will be obliged to hold core Tier 1 Capital equivalent to 7 percent of their risk-weighted assets, compared with 2 percent under the previous international rules. As many as 30 of the world’s largest banks will be required to hold the additional capital under the plans agreed on this weekend, meaning they may have to hold as much as 9.5 percent in reserve.
(For a related story on the Basel Committee’s surcharges, click here. To read a story about how the rules apply to contingent capital, click here. To read about bank reaction, click here.)
U.K. banks can “do more than just follow” the timeframe for complying with Basel III, King told journalists in London on June 24. “It would be better if they were slightly ahead of the schedule.”
Minimum Requirements
The Basel rules constitute “minimum requirements” that individual countries can exceed, the BIS said, mirroring calls by several European Union finance ministers, including George Osborne, that national regulators should be left free to toughen the rules for their banks.
That stance is in contrast to draft plans prepared by the European Commission for applying Basel III in Europe that would leave national regulators limited flexibility to add extra rules on a case by case basis.
“Delay or weakening of the agreements would jeopardize financial stability and the robustness of the recovery over the long term,” the BIS said. “The full, timely and consistent implementation of all relevant standards by banks, along with rigorous enforcement by supervisors, is critical,” it said.
Dividend Payments
The BIS also called for lenders to be forbidden from taking advantage of the 2013 through 2019 phase-in period for Basel III to increase dividend payments.
“Banks should not be permitted to increase their capital distributions simply because the deadline for achieving the minimum standards is still some way off,” the BIS said. This applies “particularly if there are signs of growing macroeconomic risks and imbalances.”
Regulators should also take a stronger role in supervising banks to make sure they operate within agreed capital levels and balance risk, the BIS said.
“Authorities must supervise in a more intensive and more intrusive fashion especially for the largest and most complex banks,” it said. Supervision is “needed to ensure that banks operate with capital levels, liquidity buffers and risk management practices that are commensurate with the risks taken.”
To contact the reporters on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net;
To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net.