Australian banks looked like they have escaped the worst of the impact of the new capital rules for banks.
The new rules, to be approved finally later this year, were revealed in a statement yesterday from the Bank of International Settlements.
The news helped send markets in Asia higher (see separate story).
But like many banks around the world, our banks face years of pressure on margins from building and maintaining the higher asset ratios, and in some cases improving the quality of the assets in their liquidity buffers.
And that’s likely to put pressure on dividends, profit margins and lending and borrowing rates, but it should be nothing like what we will see from some of the biggest names in world banking.
Already Deutsche Bank has confirmed plans to raise up to $US12.4 billion in a rights issue to raise new high quality equity and to bid for the 71% of Germany’s Postbank it doesn’t own.
It has to mop up the outstanding shares and then add to its capital base and buffer
The new regulations are called Basel III and would force banks to more than triple their current reserves and would be phased in from 2013 and some would have a decade to reshape their capital bases.
Under the new rules to be phased in from 2013, banks would be required to hold more reserves by January 1, 2015, with the so-called core Tier 1 capital raised to 4.5% from 2.0% at the moment.
In addition, banks would be required by January 1, 2019 to set aside an additional buffer of 2.5% to "withstand future periods of stress", bringing the total core reserves required to 7.0%.
This, international bank regulators said in their statement, "helps to ensure that banks maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress".
They added that this tool would go towards stopping banks from issuing "discretionary bonuses and high dividends, even in the face of deteriorating capital positions".
Certain assets would also no longer be considered as appropriate reserves, and would have to be replaced by better quality assets beginning in 2013 and some banks especially in Germany will have a decade to replace non-qualifying assets (such as German government hybrid capital) with better quality assets, such as government bonds or high grade corporate debt that can be easily sold in times of stress.
It has to be pointed out that the new rules replace the Basel 11 rules, which were in the process of being completed when the credit crunch hit in 2007.
The new rules were supposed to be more efficient and were said to be designed to give banks and regulators a clear idea of risk and the cost to capital. They did nothing of the sort and in fact some academics, bankers and analysts argue that they in fact added to the damage caused by the credit crunch by allowing banks to self manage risk using dodgy indicators.
They elevated roles of credit rating agencies that were a part of Basel 11 in assessing capital quality, but are not present in the new rules, which is a relief, nor are banks to be allowed a lot of latitude and freedom to self assess their own risk levels or to run highly leveraged balance sheets, which was another cause of the intensity of the collapse in the crunch and which the last rules couldn’t manage.
Banks will have less than five years to comply with the minimum ratios – 4.5% common equity and 6% Tier 1 – and until January 1, 2019, to meet the buffer requirements, the Basel board of governors said in a statement yesterday. Tier 1 capital, whose definition has been narrowed by the Basel committee, includes common equity and perpetual preferred stock.
Banks are currently required to have common equity equal to 2% of total assets and 4% Tier 1 capital.
The committee also gave banks until the end of 2017 to comply with the tighter definitions of capital and said that a new short-term liquidity standard wouldn’t be implemented until the beginning of 2015. While a separate long-term liquidity rule has been shelved under pressure from the banking industry, the short-term rule was expected to go into effect earlier. The two liquidity rules would require banks to hold enough cash and easily cashable assets to meet liabilities.
According to US reports, Of the 24 US banks represented on the KBW Bank Index, seven including Bank of America and Citigroup would fall short of the new ratios based on calculations using the revised definitions of capital. That was according to reports late last week.
European banks are less capitalized than US or Australian ones and therefore look like being the hardest hit.
Germany’s bankers association claimed last week that the country’s 10 biggest banks, including Deutsche Bank and Commerzbank AG (which is 25% owned by the German Government), may need about 105 billion euros in fresh capital because of new regulations.
Switzerland’s Credit Suisse says it’s clear and said yesterday that it expects to comply with the new rules “without having to materially change our growth plans or our current capital and dividend policy”.
Societe Generale is another Euro major that looks clear. It claimed in a statement yesterday that it would not need new capital.
The big imponderable is what the statement said about those banks deemed too big to fail, or banks of systemic importance. They can expect further curbs, as the regulators also noted in their st
