Under Basel III, the Tier 1 capital ratio is pegged at six per cent, with core Tier 1 at 4.5 per cent.
In January 2013, core Tier 1 will rise from 2 per cent to 3.5 per cent, with full phase-in of the Tier 1 rules to be completed by January 2015.
Curbs announced in July on the use of deferred taxes and mortgage-servicing rights in Tier 1 capital will take full effect in January 2018.
Existing state capital injections into banks can be kept until 2018.
CAPITAL CONSERVATION BUFFER
Basel III introduces a capital conservation buffer of 2.5 per cent that will sit on top of Tier 1 capital.
Any bank whose capital ratio fails to stay above the buffer faces restrictions on payouts like dividends, share buybacks and bonuses.
The new buffer will have to be composed of common equity, after the application of deductions like deferred taxes.
The buffer will be phased in from January 2016 and will be fully effective in January 2019.
COUNTERCYCLICAL CAPITAL BUFFER
This new buffer is set at 0 to 2.5 per cent of common equity or other full loss-absorbing capital.
The aim of the buffer is to force banks to start building up such an extra buffer when supervisors see excessive credit in the system that threatens to spark loan losses later on. Banks would then tap the buffer to offset such losses without having to raise fresh capital immediately.
DEFINITION OF CAPITAL
This aims to improve the quantity and quality of capital. The predominant form of Tier 1 capital must be common equity and retained earnings.
Banks can include deferred tax assets, mortgage-servicing rights and investments in finance institutions to an amount no more than 15 per cent of the common equity component.
This aims to put a cap on build-up of leverage in the banking sector on a global basis for the first time.
It will help to lessen the risk that eventual deleveraging could destabilise the sector, and introduce extra safeguards.
The leverage ratio will be calculated in a comparable manner across jurisdictions, adjusting for any remaining differences in accountistandards.
A trial leverage ratio of 3 per cent of Tier 1, or balance sheets cannot exceed 33 times Tier 1 capital, is to be trialled before a mandatory leverage ratio is introduced in January 2018.
The world’s first set of common liquidity requirements aims to ensure banks have enough liquid or cash-like assets to tide them through a very severe short-term shock and for less severe conditions in the medium to longer term.
The short-term liquidity buffer is to be mostly sovereign debt but include high-quality corporate debt.
A one-year horizon liquidity buffer, known as a net stable funding ratio, will be trialled and become mandatory in January 2018.
These proposals aim to strengthen capital requirements for counterparty credit exposures arising from banks’ derivatives, repo and securities financing activities. There will be a risk weighting of one to three per cent on banks’ mark-to-market and collateral exposures to a central counterparty. The weighting on non-centrally cleared contracts will be higher.