Banks €485bn short of Basel capital targets

 
Tim Wallace
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THE WORLD’S largest international banks need to shore up their balance sheets to the tune of hundreds of billions of euros if they are to hit regulatory targets to improve financial stability, a report from the Basel Committee revealed yesterday.

The monitoring report also revealed most banks fail to meet liquidity coverage ratio requirements, and overall are €1.76 trillion (£1.45 trillion) short.

However analysts warned the Basel III rules were pushing banks away from lending at the worst possible time, taking credit away from firms and consumers just when the economy needs a boost from spending.

The study was based on June 2011 data from 103 international banks with at least €3bn in Tier 1 capital plus 109 others. It showed the average large bank has 7.1 per cent common equity Tier 1 capital, exceeding the 4.5 per cent minimum requirement.

However, additional requirements, including the capital conservation buffer and the surcharge for globally systemically important banks, push that requirement to seven per cent.

To hit that target, banks must raise an additional €485.6bn before deadlines, which range from 2015 to 2019.

That huge gap compares with €356.6bn pre-tax profits made by all of the banks surveyed in the twelve months before the data was analysed, and the necessary capital will have to be raised through asset sales, share issues and cutbacks in loan issuance.

Economists questioned whether this level of pressure on banks to deleverage will benefit the industry and the wider economy.

“The extent of the regulatory demands on the banking industry is already undesirably severe, and as the Basel III deadlines approach, the pressure can only intensify, particular in Europe where banks have most to do,” said Jamie Dannhauser from Lombard Street Research. “These figures make clear how much further the European banking sector is going to have to retrench in coming years.”

The banks studied are also €1.76 trillion short of liquid assets.

Only 45 per cent of banks meet or exceed the 30-day liquidity coverage ratio requirement, giving banks “a huge mountain to climb” by the 2015 deadline, warned Dannhauser.

Banks are very heavily reliant on public debt to meet the liquidity rules – 57.7 per cent of eligible assets are securities issued or guaranteed by sovereigns, central banks and other public sector entities. A further 27.6 per cent is held in cash or central bank reserves.

The Basel rules place great value on state-issued securities, deeming them risk free, and thus stockpiling them is the cheapest way for a bank to build up its levels of eligible liquid assets.