The largest global banks, especially those in Europe, may be hundreds of billions of dollars short of the capital reserves needed to comply with new regulations and may face pressure to shed risky assets as a result, according to figures released Thursday by two influential regulatory panels.
One of the panels, the Basel Committee on Banking Supervision, also provided a more detailed description of the rules it was developing for global banks, prompting some critics to complain that the definition of banks that are too big to fail seemed to be narrowing.
Based on their 2009 financial results, the 94 largest banks would have been 577 billion euros, or $769 billion, short of the risk-free capital they will need to hold under new rules endorsed by the Group of 20 countries, the committee said.
The banks have until Jan. 1, 2019, to fully comply with the new rules, and many have already started bolstering their reserves. Their collective profit in 2009 — a bad year for banking — was 209 billion euros, suggesting that most institutions would be able to meet the new requirements by retaining profits instead of paying them out to shareholders.
“The transition period provides banks with ample time to move to the new standards in a manner consistent with a sound economic recovery while raising the safeguards in the system against economic or financial shocks,” said Nout Wellink, chairman of the Basel Committee and president of the Dutch central bank.
The largest banks, from 23 countries including the United States, Japan and China, are also short of liquid assets that the rules will require them to hold as protection against short-term shocks, like the one after the failure of Lehman Brothers in 2008.
Taken together, at the end of 2009 the big banks had only 83 percent of the short-term cash they would need to keep operating during an emergency, when raising cash in the money markets would be difficult.
Separately, the Committee of European Banking Supervisors released a study on Thursday saying that the capital shortfall for the 50 largest banks in Europe would be 263 billion euros, or $351 billion. The study used the same methodology and time frame as the Basel Committee report, suggesting that more than half the shortfall lies with European institutions. Europe also has the highest concentration of international banks.
While there is a long transition period for banks to increase capital, markets could pressure them to act sooner.
“It’s a competitive issue,” said Ernest T. Patrikis, a partner at the law firm White & Case in New York and former chief operating officer of the Federal Reserve Bank of New York. Clients may say, “‘I want to do business with a bank that has the most capital, the safest, most prudent banks,”’ Mr. Patrikis said.
One of the Basel Committee’s findings was that smaller banks were better capitalized, on average, than the big global institutions. Among 263 smaller institutions surveyed, the shortfall in reserve capital was only 25 billion euros, or $33 billion, based on 2009 results, a sum almost covered by a single year of profits. “The small- and medium-sized banks, which are important for lending to business, are for the most part already there,” said Stefan Walter, secretary general of the Basel Committee.
The smaller institutions also had almost all the cash they needed to withstand a financing shock, according to the committee, which consists of national bank regulators and heads of central banks. By contrast, the big institutions generally are more involved in activities that raise their level of risk and therefore their assets as calculated for regulatory purposes. The lower a bank’s risk-weighted assets, the less capital it will have to hold. Big banks may face pressure to shed riskier assets to more easily comply with the new rules.
The committee also provided a 69-page description of the new rules, intended to clarify what they will mean in practice.
Harald A. Benink, a professor of economics at Tilburg University in the Netherlands, who follows banking regulation closely, said he was disappointed in what seemed to be a narrowing of the definition of banks too big to fail.
The Basel Committee and a separate panel based in Basel, the Financial Stability Board, are developing more stringent rules for banks whose problems can send shock waves around the world.
The document released Thursday suggested that the additional requirements would apply only to banks that are active globally. That is a mistake, Mr. Benink said, because countries like China have large banks that are not very active overseas but could rock the global financial system if they ended up in trouble.
“The number of banks which will qualify as global systematically important financial institutions will be very small,” he said. “My fear is that with the focus on global institutions this will not be a meaningful exercise.”
Leaders of the Group of 20 countries endorsed the Basel rules when they met in Seoul, South Korea, in November, and national authorities are incorporating them into their banking regulations.