Banks boost capital ahead of Basel rules

THE AMOUNT of risk-adjusted capital (RAC) held by banks around the globe is increasing as institutions prepare for new regulatory requirements.

Banks worldwide had an average eight per cent RAC ratio as of June last year, up from 6.7 per cent at the same point in 2009, according to Standard & Poor’s (S&P) latest analysis.

S&P found banks had been working to improve their capital position ahead of tighter Basel III regulations, which demand lenders have stronger core Tier 1 ratios of capital.

“Capital raising, conversion of hybrids into common equity, suspension of dividends, asset disposals, and a reduction in risk assets have allowed a number of banks to significantly increase their capital ratios in the past 18 months,” S&P credit analyst Bernard de Longevialle said.

The Bank of China (Hong Kong) was ranked strongest on the agency’s scale with 13.4 per cent, while German state-backed lender Commerzbank was placed bottom of 75 banks examined, with a rating of 3.6 per cent.

HSBC was the highest placed British-based bank, with a ratio of 9.4 per cent, whilst Lloyds Banking Group was the lowest placed with a ratio of 6.7 per cent

The latest S&P ratios are significantly lower on average than Basel I and Basel II Tier 1 ratios, according to the report.

S&P claims the measure offers a more comparable and internationally consistent measure of bank capital than alternatives, such as the Basel Tier 1 ratio.

Yet the ratings agency believes as banks improve their capital positions for Basel III the gap between the two measurements should close, according to de Longevialle.

“The expected implementation of the Basel III framework is likely, in our view, to reduce the gap between RAC and regulatory ratios,” he said.