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Net Net: Promoting innovation and managing change

Report: Basel Capital Requirements Weaker Than Expected


International bank regulators meeting in Basel, Switzerland have decided on new minimum levels for Tier 1 capital that are much weaker than expected the BBC's Robert Preston is reporting.

Stack of U.S. hundred-dollar bills

"Central bank governors and senior regulators are set to ordain that banks must have a minimum core tier one capital ratio, including a new so-called 'buffer' to protect against extreme economic conditions, of 7%," Preston writes.

Apparently the downward motion continued from there.

Preston explains:

This is considerably lower than was wanted by the "hawks", the US, UK and Switzerland. They wanted a core tier one capital ratio of 8 to 9% including buffer, which is what British banks currently have to maintain. In fact most British banks currently have a core tier one ratio of around 10%.

But the new 7% minimum has been agreed in the face of stiff resistance from a number of countries, led by Germany, many of whose banks typically have much lower stocks of core capital in the form of equity and retained earnings - and will have great difficulty meeting the new standard.

This is probably bullish news for short term traders in bank stocks.

But the falling requirements may mean that the global financial system will be more vulnerable in times of economic distress.

Keep in mind, however, that even a 7% Tier 1 capital requirement is more stringent than the 6% required for a U.S. bank to be considered "well-capitalized" by the FDIC or the 4% currently required by Basel.

Many US banks already have more than enough Tier 1 capital to meet a 7% requirement. In its latest quarterly filing, JP Morgan Chase said it has 9.6% Tier 1 capital.