Big banks to set aside US$77b in additional capital from 2019
Print Edition
SOME of the world’s biggest banks will have to set aside US$77 billion in extra capital from 2019 under new trading book rules unveiled yesterday by global regulators hoping to prevent another financial crisis.
In the latest sign of how regulators are being more accommodative as policy-makers emphasize the need to help economies grow, the Basel Committee of banking supervisors has eased its initial proposal for a hike in capital requirements.
Banks had warned that overly burdensome demands would make trading uneconomic, crimp lending and thin already stressed liquidity in markets.
Basel did not name the banks likely to be effected, but major US trading firms such as JP Morgan as well as European players such as Deutsche Bank are likely to be in the frame.
Policy-makers hope that publication of the rules will give clarity on the final, post-crisis regulatory picture for banks so they can forge sustainable businesses.
While the new rules won’t mark a huge overall hike in capital requirements, it could dampen ambitions at lenders to expand trading. Some lenders are already scaling back on trading activities to reduce the impact of the new rules.
Under its final, long-awaited rules on how much capital banks must hold in case stocks, bonds and other markets turn sour as they did in 2007-09, Basel has raised the trading book assets of a bank’s total risk-weighted assets to around 10 percent from 2019 from about 6 percent.
Each percentage point difference is equivalent to less than 20 billion euros (US$22 billion) in extra capital, and an impact study by Basel shows that for most lenders there will be little change, if any, in capital requirements.
The bulk of the 70 billion euros in extra capital requirements will fall on just a handful of big trading banks, though they are unlikely to need fresh capital as they typically hold far more than the overall minimum needed.
Under the new rules, the funds needed against non-securitized assets, which make up the bulk of trading books and include shares, foreign exchange, swaps and commodities, will rise by a median of 27 percent, Basel said.
For securitized or pooled debt, the capital increase will be a more modest 22 percent as far heftier hikes were introduced in the immediate aftermath of the financial crisis in a quick-fix known as Basel 2.5.
A core aim of the rules is to end incentives for banks to shift assets between their banking and trading books to exploit variations in capital charges. Regulators also want more consistent capital calculations at big banks.
Banks that use models to calculate will also have to run the same calculations using the “standard” test to act as a capital floor.
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