Historic deal to fuel bank frenzy

Marion Dakers
A GLOBAL flurry of bank rights issues, asset disposals and other realignments could be on the cards in the wake of the new Basel III rules that were revealed last night.

Global regulators thrashed out a deal to impose a seven per cent capital holding on all banks to cushion them from future market shocks.

The panel of banking heads in Switzerland yesterday raised the minimum core Tier 1 capital level from two to 4.5 per cent, with an extra 2.5 per cent required as a conservation buffer against financial headwinds.

Lenders that fail to meet the second rule will be stopped from paying dividends, though not forced to raise cash.

Jean-Claude Trichet, president of the European Central Bank and chairman of the Basel supervisory panel, said the new rules are “a fundamental strengthening of global capital standards” that will give substantial support to long-term stability.

The large British banks already meet these benchmarks comfortably, with Tier 1 capital ratios already above nine per cent, but others could be forced to take drastic steps before the full rules are enforced in 2019.

The Basel Committee said: “Large banks will need, in the aggregate, a significant amount of additional capital to meet these new requirements.”

Deutsche Bank is already working on plans to raise €9.8bn (£8.1bn), in part to pay for the new rules, and Germany’s banking association estimated its ten biggest banks may need €105bn (£86.9bn) of extra capital.

This is despite Germany winning a key concession in the Basel III talks, which will allow a longer phasing-out period for types of capital commonly used in the country’s institutions.

Bank of America will be one of the banks hardest hit by the stricter international rules, according to analysts. The US giant may resort to selling assets including its stake in asset manager BlackRock to fund its cash cushion, and halt dividend payments until the money-raising is complete.

There was also speculation last night that Citigroup could withhold dividends until at least the end of 2011 while it saves up for the extra conservation buffer.

UBS and Credit Suisse are constrained by Swiss rules obliging them to hold twice the minimum capital, and UBS has already cancelled dividends for the next several years.

“It’s a mixed blessing for the banks,” said Robbert van Batenburg, head of equity research at Louis Capital Markets in New York. “I don’t think there are any nasty surprises and there’s...plenty of time to raise capital if needed.”