Basel Committee gets tough on world banks to avoid another crisis
Banks have lobbied hard to water down new regulatory updates, warning they make it harder to lend to businesses
London — A decade since Lehman Brothers bank collapsed, the world’s top lenders largely meet tougher capital requirements aimed at averting a repeat of the ensuing markets meltdown, regulators said on Thursday.
The Basel Committee on Banking Supervision said that, as of December 2017, the world’s 111 biggest cross-border, or “Group 1”, banks would have had a collective capital shortfall of only €25.8bn had all Basel’s rules been in force, a fraction of their earnings.
The overall core equity capital ratio, which measures capital to risk-weighted assets, would have risen to 12.9% from 12.5% in June 2017, roughly triple pre-crisis levels.
Basel has published regular updates on compliance with the tougher capital rules introduced in the aftermath of the crisis, but the latest assumes that a final batch of requirements agreed only last December are also in force.
The minimum versions of these additional rules won’t become mandatory until January 2022, but Thursday’s figures show banks are largely compliant years ahead of the deadline as markets pile pressure on lenders to demonstrate their financial resilience.
Banks had lobbied hard to water down the additions, warning that hefty increases in capital requirements would make it harder for them to lend to businesses. But Basel said on Thursday that there was no significant increase in minimum capital requirements as a result of the final rules added last December. The capital shortfall does not reflect any additional capital requirements that national regulators impose.
Separately, the European Banking Authority said that banks in the EU would need a collective €24.5bn of capital to meet the full Basel requirements, of which €6bn would be for core buffers.
Operation risk rockets
Most of a banks’ core capital buffer covers the risk of loans defaulting, but such “credit” risk has fallen significantly and now represents 65.2% of buffers, Basel said.
The amount of capital set aside to cover operational risks — such as fines for misconduct, fraud, cyber-attacks, poor internal controls and unauthorised trading — as of June 2011 is 16.4% currently, Basel said.
Since the financial crisis, banks have been fined billions of dollars for trying to rig interest rate benchmarks such as Libor and currency markets. Apart from capital, major banks must also issue a special debt known as total loss-absorbing capacity (TLAC) that can be converted to capital if a crisis burns through their core capital buffer. This aims to avoid a repeat of taxpayers having to bail out lenders.
Basel said that when the minimum requirements for TLAC due in 2022 are applied, eight of the world’s 30 top banks have a combined shortfall of €82bn, down from €109bn at the end of June 2017.