The world's major banks continue to shore up their risk-based capital as they prepare to meet new stricter banking regulations, narrowing the total shortfall under Basel III's 4.5 percent minimum capital requirement to 2.2 billion euros as of end-2012, 1.5 billion less than as of June 30, 2012.
In its latest review of the impact of the new, stricter global banking rules that are being phased in by 2019, the Basel Committee on Banking Supervision (BCBS) said the aggregate shortfall for the major banks under a 7.0 percent common equity Tier 1 (CET1) target - which includes surcharges for banks that are considered systemically-important - fell by 82.9 billion euros to 115.0 billion.
This shortfall compares to combined net tax profit prior to distributions at the so-called Group 1 banks of 419.4 billion euros at the end of 2012, which means the shortfall accounts for just over one-quarter of the banks' total profit.
The Basel Committee, which groups supervisory authorities from almost 30 jurisdictions, has conducted three previous reviews of the impact of Basel III on financial markets and the result is that banks are slowly but surely making progress in meeting the new rules that were agreed by global leaders in 2010 in an effort to strengthen the global financial system following the 2008 crises.
The new rules imposed higher capital charges on banks and stricter supervision, especially on those banks that were globally active.
The latest survey, which assumes that Basel III has been fully implemented as of Dec. 31, 2012, looked at the impact of the new rules on a total of 223 banks that are split into two groups. There are 101 banks in the so-called Group 1, banks with Tier 1 capital above 3 billion euro while Group 2 comprises 122 banks that are smaller, yet still internationally active.
The capital shortfall for the Group 2 banks was estimated at 11.4 billion euros under the 4.5 percent capital minimum and 25.6 billion under the 7.0 percent capital standard compared with total net profit before distributions of 29.5 billion euros in 2012.
Unlike the lower capital shortfall for the major Group 1 banks, the Basel Committee said the capital shortfall for the smaller banks had risen but this was mainly due to the first-time inclusion of some new banks while a very small part of the sample had actually posted an increase in the capital shortfall.
The average Tier 1 capital ratio across the entire sample of 101 major banks amounted to 9.2 percent - well above the minimum of 4.5 percent and the targeted 7.0 percent. For Group 2 banks the capital ratio averaged 8.6 percent, also well above the minimum standards.
In addition to higher risk-based capital requirements, global banking regulators have also included a so-called liquidity coverage ratio (LCR) that aims to ensure that banks have an enough high quality liquid assets, such as cash or assets that can quickly be converted into cash, to meet a bank's need for liquidity during a 30-day period of stress in financial markets.
In January this year global regulators gave banks more time to build up these cash buffers, phasing in the rules at 60 percent from January 2015 and the rising to 100 percent by 2019.
The latest review for the first time includes data for the new LCR standard and finds that the weighted average LCR for the Group 1 major banks was 119 percent end-2012 and 126 percent for Group 2 banks, i.e. well above the minimum for both samples of banks.
For all 223 banks, 68 percent reported an LCR that met or exceeded the 100 percent minimum while 90 percent reported an LCR at or above a 60 percent initial requirement, raising the question of why banks had complained so vocally that they could not meet the original 2015 deadline.
A third component of Basel III is the Net Stable Funding Ratio (NSFR), a standard for longer-term liquidity that is currently under review by banking regulators to avoid any unintended consequences prior to its implementation in January 2018.
Based on the original NSFR standards from 2010, the review found that the weighted average NSFR for the Group 1 banks improved to 100 percent by end-2012 from 99 percent in June 2012. For Group 2 banks, the average NSFR declined to 99 percent from 100 percent in mid-2012.