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Basel III rules text and results of the quantitative impact study QIS issued by the Basel Committee

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Banks across the world will need to raise nearly €600 billion ($793 billion) in extra capital as a result of new rules designed to prevent another global financial crisis, the Bank for International Settlement said Thursday.


The estimate is derived from a comprehensive impact study, based on results from 263 of the world's largest banks, and represents the first time that the BIS has put a price on its new minimum capital requirements, dubbed Basel III. At the same time, the BIS published final, official texts of its new rules on liquidity, which analysts said hinted at some worrying deficiencies at some banks, especially in Europe. The BIS concluded that "Group 1" banks across the world--that is those with over €3 billion in capital--would need a total of €165 billion in additional common equity just to meet the new absolute minimum ratio of 4.5% of risk-weighted assets. This figure rises to €577 billion when the need for a "capital conservation buffer" of another 2.5%—another mandatory part of the new rules—is taken into account. The BIS's estimate is based on data at the end of 2009, and doesn't reflect any of the capital raising that banks have done since then. On the other hand, it also doesn't take into account the extra capital charges that are likely to be imposed on banks deemed too big to fail, know to regulators as systemically important financial institutes. Under Basel III, banks will face restrictions on dividend payments and executive pay if their capital falls below 7% of their assets, measured on a risk-weighted basis. Most of the new rules are to be phased in by 2018, the BIS confirmed Thursday. Analysts at Credit Suisse said that there were few surprises in the final version of the text, but said that the regulators had changed some fine print to give greater recognition of hedging strategies to reduce value-at-risk, a benefit to investment banks in particular. The BIS's main proposals on capital were approved by leaders of the Group of 20 industrialized and developing nations at their November summit in Seoul, but regulators hadn't finalized details of plans to ensure minimum standards of liquidity by then.

Regulators have developed one short-term and one medium-term measure to ensure that banks have enough liquid assets to withstand a shock loss of access to funding markets, such as happened after the collapse of U.S. investment bank Lehman Brothers Inc. in 2008. The new Liquidity Coverage Ratio and Net Stable Funding Ratio require banks to hold enough cash, or assets that can reliably be converted into cash, to cover their expected outflows on a one-month and a one-year horizon, respectively. The BIS said it found that Group 1 banks have only 83% of the assets they would need to guarantee surviving a liquidity shock for a month, as measured under the LCR. It didn't identify how any individual banks fared. However, it said the shortfall is less acute when measuring banks' NSFR. It said Group 1 banks have an aggregate NSFR of 93%, only 7% short of the requirement. The NSFR has attracted heavy criticism from banks as it affects the traditional task of "transforming" short-term money, like normal checking accounts, into long-term credit for the economy. Those averages, however, mask some worrying individual shortfalls at individual banks, Arturo de Frias, head of bank research at Evolution Securities in London, said in a research note. He noted that the Committee of European Banking Supervisors, a group of regulators from European Union nations, said the 50 largest European banks that took part in the BIS survey faced combined shortfalls of around €1 trillion in liquid assets at the end of 2009 under the LCR, and €1.8 trillion when measuring NSFR. "The estimated shortfalls in the LCR and the NSFR are not additive, as decreasing the shortfall in one standard may result in a similar decrease in the shortfall of the other standard," CEBS said. Evolution's Mr. De Frias said the findings underline that refinancing risks are replacing capital adequacy as the main source of concern for European banks.

At the same time, the BIS also published guidelines on how national regulators should implement another provision of the new rules, the so-called countercyclical capital buffer. Basel III will encourage national regulators to ask banks to keep capital against up to another 2.5% of assets during good times, so as to create additional protection when the lending cycle turns and loans start to go bad. In contrast to global standards, the countercyclical buffer has to be implemented at a national level, as the world's various economies are never at the same stage of the business cycle.

The BIS said national regulators should give banks up to 12 months' notice when they are raising that requirement. However, any cuts would have immediate effect, so as to ensure that banks can continue to lend in the event of a downturn. The BIS said it expected regulators to base their assessment of the need for such measures on the development of private-sector credit relative to gross domestic product. However, it said they shouldn't interpret this "mechanistically" and called upon them to exercise judgment. It warned regulators against using the buffer "to manage economic cycles or asset prices," saying it is primarily intended to provide the banking sector with additional protection against possible losses.

Press Release:

The Basel Committee issued today the Basel III rules text, which presents the details of global regulatory standards on bank capital adequacy and liquidity agreed by the Governors and Heads of Supervision, and endorsed by the G20 Leaders at their November Seoul summit. The Committee also published the results of its comprehensive quantitative impact study (QIS).

Mr Nout Wellink, Chairman of the Basel Committee on Banking Supervision and President of the Netherlands Bank, described the Basel III Framework as "a landmark achievement that will help protect financial stability and promote sustainable economic growth. The higher levels of capital, combined with a global liquidity framework, will significantly reduce the probability and severity of banking crises in the future." He added that "with these reforms, the Basel Committee has delivered on the banking reform agenda for internationally active banks set out by the G20 Leaders at their Pittsburgh summit in September 2009".

The rules text presents the details of the Basel III Framework, which covers both microprudential and macroprudential elements. The Framework sets out higher and better-quality capital, better risk coverage, the introduction of a leverage ratio as a backstop to the risk-based requirement, measures to promote the build up of capital that can be drawn down in periods of stress, and the introduction of two global liquidity standards. 

Transition and implementation

The Committee has put in place processes to ensure the rigorous and consistent global implementation of the Basel III Framework. The standards will be phased in gradually so that the banking sector can move to the higher capital and liquidity standards while supporting lending to the economy.

With respect to the leverage ratio, the Committee will use the transition period to assess whether its proposed design and calibration is appropriate over a full credit cycle and for different types of business models. Based on the results of a parallel run period, any adjustments would be carried out in the first half of 2017 with a view to migrating to a Pillar 1 treatment on 1 January 2018 based on appropriate review and calibration.  

Both the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) will be subject to an observation period and will include a review clause to address any unintended consequences.

QIS results

The Committee today released the Results of the comprehensive quantitative impact study. The Committee conducted a comprehensive QIS exercise to assess the impact of capital adequacy standards announced in July 2009 and the Basel III capital and liquidity proposals published in December 2009. A total of 263 banks from 23 Committee member jurisdictions participated in the QIS exercise. This included 94 Group 1 banks (ie those that have Tier 1 capital in excess of €3 billion, are well diversified and are internationally active) and 169 Group 2 banks (ie all other banks).

The QIS did not take into account any transitional arrangements such as the phase-in of deductions and grandfathering arrangements. Instead, the estimates presented assume full implementation of the final Basel III package, based on data as of year-end 2009. No assumptions were made about banks' profitability or behavioural responses, such as changes in bank capital or balance sheet composition, since then or in the future. For that reason the QIS results are not comparable to industry estimates, which tend to be based on forecasts and consider management actions to mitigate the impact and which incorporate analysts' estimates where information is not publicly available.

Including the effect of all changes to the definition of capital and risk-weighted assets, as well as assuming full implementation as of 31 December 2009, the average common equity Tier 1 capital ratio (CET1) of Group 1 banks was 5.7%, as compared with the new minimum requirement of 4.5%. For Group 2 banks, the average CET1 ratio stood at 7.8%. In order for all Group 1 banks in the sample to meet the new 4.5% CET1 ratio, the additional capital needed is estimated to be €165 billion. For Group 2 banks, the amount is €8 billion. 

Relative to a 7% CET1 level, which includes both the 4.5% minimum requirement and the 2.5% capital conservation buffer, the Committee estimated that Group 1 banks in aggregate would have had a shortfall of €577 billion at the end of 2009. As a point of reference, for this sample of banks the sum of profits after tax and prior to distributions in 2009 was €209 billion. Group 2 banks with CET1 ratios less than 7% would have required an additional €25 billion; the sum of these banks' profits after tax and prior to distributions in 2009 was €20 billion. Since the end of 2009, banks have continued to raise their common equity capital levels through combinations of equity issuance and profit retention.

The Committee also assessed the estimated impact of the liquidity standards. Assuming banks were to make no changes to their liquidity risk profile or funding structure, as of end-2009:

  • The average LCR for Group 1 banks was 83%; the average for Group 2 banks was 98%.
  • The average NSFR for Group 1 banks was 93%; the average for Group 2 banks was 103%.

Banks have until 2015 to meet the LCR standard and until 2018 to meet the NSFR standard, which will reflect any revisions following each standard's observation period. Banks that are below the 100% required minimum thresholds can meet these standards by, for example, lengthening the term of their funding or restructuring business models which are most vulnerable to liquidity risk in periods of stress. It should be noted that the shortfalls in the LCR and the NSFR are not additive, as decreasing the shortfall in one standard may also result in a decrease in the shortfall in the other standard.

Mr Wellink noted that "the Basel III capital and liquidity standards will gradually raise the level of high-quality capital in the banking system, increase liquidity buffers and reduce unstable funding structures. 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". He added that in the case of the liquidity standards, "we will use the observation period for the liquidity ratios to ensure that we have their design and calibration right and that there are no unintended consequences, at either the banking sector or the broader system level".

The Basel Committee and the Financial Stability Board (FSB) are also issuing an updated report of the Macroeconomic Assessment Group which analyses the economic impact of the Basel III reforms over the transition period. The updated report and a separate press release will be issued in the coming days.

The Committee also issued today Guidance for national authorities operating the countercyclical capital buffer as a supplement to the requirements set out in the Basel III rules text. The primary aim of the countercyclical capital buffer regime is to achieve the broader macroprudential goal of protecting the banking sector from periods of excess aggregate credit growth that have often been associated with the build-up of system-wide risk. In addition to providing guidance for national authorities, this document should help banks understand and anticipate the buffer decisions in the jurisdictions to which they have credit exposures.

The Committee is conducting further work on systemic banks and contingent capital in close coordination with the FSB. In the coming days, the Committee will also issue a consultation paper on the capitalisation of bank exposures to central counterparties.

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