Geneva: Banks would have required an additional €602 billion in capital at the end of 2009 to meet new Basel III rules aimed at ensuring they could cope with any fresh financial crisis, regulators said Thursday.
If the international rules on raising top quality capital from 4.0% to 7.0% of risk assets were applied to banks at the end of 2009, “group one banks in aggregate would have had a shortfall of €577 billion.”
In addition, “group two banks ... would have required an additional €25 billion,” the Basel Committee on banking supervision said in a study on 263 banks from 23 member jurisdictions.
Group one banks are made up of big international banks that have core Tier 1 capital in excess of €3.0 billion ($3.9 billion dollars) and group two includes all other banks.
While the study examined the ability of banks to apply the new regulations at the end of 2009, in reality, they have several years -- to 2019 -- to reach full compliance.
They would be required to raise common equity -- the strongest form of loss absorbing capital, to the equivalent of 4.5% of overall risk assets by 1 January 2015 from 2.0% at the moment.
In addition, banks would be required by 1 January 2019 to set aside an additional buffer of 2.5% to “withstand future periods of stress,” bringing the total of such core reserves required to 7.0%.
“The transition period provides banks with ample time to move to the new standards in a manner consistent with a sound economic recovery, while raising the safeguards in the system against economic or financial shocks,” said Nout Wellink, chairman of the committee.
The study also pointed out that “since the end of 2009, banks have continued to raise their common equity capital levels through combinations of equity issuance and profit retention.”
The global financial crisis in 2007-2008 forced many governments in industrialized countries to rescue their commercial banks, since allowing the biggest ones to fail could have brought down whole economies.
Regulators have since moved to toughen up capital rules, in a bid to prevent a repeat of the crisis and make banks more resilient to crisis shocks.
In addition to the new capital rules, further curbs are expected to be imposed on major banks judged to have systemic importance.