The Group of Governors and Heads of Supervision(G-20 we can call it) the body of the Basel Committee on Banking Supervision, in its 12th Sep 2010 meeting, announced a substantial strengthening of existing capital requirements. The Committee consists of representatives from Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The final approval will be given for the BASEL III in November 2010. The key recommendations are given below:
Capital requirements and Buffers
Common Equity after deductions
The minimum common Equity Capital ratio required is 4.5% and with conservation buffer of 2.5%, the total common equity required will be 7.0%.
Tier I capital
The minimum required is 6% and with conservation buffer of 2.5%, the total Tier I capital will be 8.5%.
The above % is to be reached gradually by banks to adhere to BASEL III norms as detailed below:
Head 1.1.2013 1.1.2014 1.1.2015 1.1.2016 1.12017 1.1.2018 1.1.2019
Equity Ratio(core tier -I capital) 3.50% 4.00% 4.50% 4.50% 4.50% 4.50% 4.50%
Buffer 0.625% 1.25% 1.875% 2.50%
Minimum Tier I capital
(Core tier –I capital plus other
qualifying tier-1 securities etc.) 4.50% 5.50% 6.00% 6.00% 6.00% 6.00% 6.00%
Minimum Total capital(uniform) 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00%
Minimum Total capital including Buffer 8.00% 8.00% 8.00% 8.625% 9.125% 9.875% 10.50%
- The Committee’s package of reforms will increase the minimum common equity requirement from 2% to 4.5%.
- The difference between the total capital requirement of 8.0% and the Tier 1 requirement can be met with Tier 2 and higher forms of capital.
- The regulatory adjustments (deductions and prudential filters including amounts above the aggregate 15% limit for investments in financial institutions, mortgage servicing rights (MSR), and deferred tax assets (DTA) from timing differences) will begin at 20% of the required deductions from common equity on 1/1/ 2014, 40% on 1/1/ 2015, 60% on 1/1/ 2016, 80% on 1/1/2017, and reach 100% on 1/1/2018.
- Core tier 1 ratio will be 4.5 to 6%. This compares with a core ratio of about 2% under the current Basel II global accord. The core ratio need to be in the form of retained earnings or shares. Many leading banks already hold tier 1 capital of 9% or more. Capital conservation buffer is additional to core tier –I capital. If a bank fails to stay above the buffer, it faces restrictions from supervisors on payouts such as bonuses, dividends and share buybacks etc.
- The committee also agreed that the capital conservation buffer can be met with common equity, after the application of deductions. The purpose of the conservation buffer is to ensure that banks maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress.
C. R. Venkata Ramani