Capital requirements could get stiffer with trading book tweak

Tim Wallace
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EUROPE’S banks could be tens of billions further behind their Basel III capital targets than previously expected if planned new trading book rules to calculate buffers are adopted, researchers from Espirito Santo warned yesterday.

The Basel Committee is consulting on changes to the way tail risks and market liquidity risks are measured, and wants increased standardisation of the models used by banks to calculate requirements.

In its preliminary estimates of the impact of the mooted changes, Espirito Santo believes banks’ core tier one ratios could be hit by as much as 88 basis points – amounting to several billion euros for some banks, and a total of tens of billions across the sector.

However, the impact remains uncertain. The consultation runs until September, and Basel III is not coming fully into force until 2019.

Meanwhile Ernst & Young warned banks who appear to have met the nine per cent capital target will have a tough time maintaining that as capital deductions are phased in and instruments phased out next year. That means more must be raised next year – a pressure which could hit lending.