Check through Basel III’s small print

BANKS around the world are rightly cheerful after the announcement of Basel III minimum capital requirements less stringent than many had feared and, in the UK, still far lower than major banks’ existing capital reserves. The inevitable gasp of relief following this news has brought an immediate uplift for most, but should not divert attention from the uncertainties that lie ahead.

The Basel committee’s work is not finished yet. There is another meeting scheduled for September 21-22, with the possibility of further talks in October. The package will then be placed before G20 leaders in Seoul this November. Even after that, the extended period over which adjustment to the new standards will take place means that they will not be implemented in full until 1 January 2019. With plenty of room for further political horsetrading, and some critical sections still to be settled, close attention needs to be paid to Basel’s exact wording to assess its likely impact.

Crucially, the treatment of banks judged systemically important will be more stringent than the standards already announced. The big four UK banks – HSBC, Barclays, RBS and Lloyds – will have to meet the higher standards. The Bank of International Settlements (BIS) announced yesterday that this “could include combinations of capital surcharges, contingent capital and bail-in debt”.

More worrying still, the BIS says a further counter-cyclical buffer of up to 2.5 per cent of common equity is to be implemented “according to national circumstances”. Analyst Nic Clarke at Charles Stanley Research suggests that this supposed global regime could in practice be applied differently from one country to another: “it does seem as though German banks are already being treated differently regarding certain sources of capital”. The Swiss announcement that they will demand a higher standard than Basel III only adds to the confusion. The new global rules may yet produce the kind of regulatory arbitrage they are designed to avoid. That will not necessarily play out to the UK’s advantage.

Meanwhile, UK banks need to check their capital reserves meet the detail of the standards announced today. If the rules do indeed require pension deficits to be excluded from the calculation of capital reserves, the big banks look far less comfortable. The banks’ deficits are in the region of £3bn each. According to LCP’s Accounting for Pensions 2010, at RBS the 2009 pension deficit was £2.9bn. With Basel III, the devil may yet be in the details.


UK bank stocks rose yesterday, with the extended period to comply with the Basel III requirements benefiting state-backed Lloyds Banking Group and RBS the most. The two banks gained 2.6 and 2.3 per cent respectively. Analysts say all the main UK banks are well above the minimum core Tier One ratios. But given concerns about the outlook for the economy, analysts are cautious on the outlook for UK banks.

European banks predicted to gain from the longer transition period were some of the top gainers with Credit Agricole up 6 per cent. Europe is seen as the most likely region for banks to need to raise funds to meet the core capital ratio, especially in Germany and Spain. Swiss regulators said they might impose stricter requirements, with an extra buffer of core Tier One in banks’ capital adequacy ratios.

US bank shares rose 2.6 per cent yesterday after executives and analysts dismissed the impact from Basel III. JPMorgan rose 3.7 per cent while Bank of America-Merrill Lynch jumped 2.8 per cent. Most of the largest institutions are unlikely to need to resort to any near-term capital raises. But the rules will force many regional banks to replace portions of their capital funded by hybrid securities with common equity.

Asian banks are already seen as well positioned to meet the Basel III requirements thanks to their strong capital positions and ample liquidity. Macquarie analysts estimate Japanese banks’ common equity ratio to be 6.3 per cent, just shy of the 7 per cent demanded by Basel III. Mizuho Financial Group rose as much as 2 per cent and Mitsubishi UFJ Financial Group increased as much as 3 per cent.