Basel iii
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12
September 2010
The Group of Governors and Heads of
Supervision announces higher global minimum capital standards
At its 12
September 2010 meeting, the Group of Governors and Heads of
Supervision, the oversight body of the Basel Committee on
Banking Supervision, announced a
substantial strengthening of existing
capital requirements and fully endorsed the agreements it
reached on 26 July 2010.
These capital reforms, together
with the introduction of a global liquidity standard, deliver on
the core of the global financial reform agenda and will be
presented to the Seoul G20 Leaders summit in November.
The Committee’s package of reforms
will increase the minimum common
equity requirement from 2% to 4.5%.
In addition, banks will be
required to hold a capital conservation buffer of 2.5% to
withstand future periods of stress bringing the total common
equity requirements to 7%.
This reinforces the stronger
definition of capital agreed by Governors and Heads of
Supervision in July and the higher capital requirements for
trading, derivative and securitisation activities to be
introduced at the end of 2011.
Increased capital requirements
Under the agreements reached, the minimum requirement for
common equity, the highest form of loss absorbing capital, will
be raised from the current 2% level, before the application of
regulatory adjustments, to 4.5% after the application of
stricter adjustments.
This will be phased in by 1
January 2015.
The Tier 1 capital requirement, which
includes common equity and other qualifying financial
instruments based on stricter criteria, will increase from 4% to
6% over the same period.
The Group of Governors and
Heads of Supervision also agreed that the capital conservation
buffer above the regulatory minimum requirement be calibrated at
2.5% and 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.
While banks are allowed to draw on the buffer
during such periods of stress, the closer their regulatory
capital ratios approach the minimum requirement, the greater the
constraints on earnings distributions.
This framework
will reinforce the objective of sound supervision and bank
governance and address the collective action problem that has
prevented some banks from curtailing distributions such as
discretionary bonuses and high dividends, even in the face of
deteriorating capital positions.
A countercyclical buffer
within a range of 0% – 2.5% of common equity or other fully loss
absorbing capital will be implemented according to national
circumstances.
The purpose of the countercyclical
buffer is to achieve the broader macroprudential goal of
protecting the banking sector from periods of excess aggregate
credit growth.
For any given country, this buffer will
only be in effect when there is excess credit growth that is
resulting in a system wide build up of risk.
The
countercyclical buffer, when in effect, would be introduced as
an extension of the conservation buffer range.
These
capital requirements are supplemented by a non-risk-based
leverage ratio that will serve as a backstop to the risk-based
measures described above.
In July, Governors and Heads
of Supervision agreed to test a minimum Tier 1 leverage ratio of
3% during the parallel run period.
Based on the results
of the parallel run period, any final adjustments would be
carried out in the first half of 2017 with a view to migrating
to a Pillar 1 treatment on 1 January 2018 based on appropriate
review and calibration.
Systemically important banks
should have loss absorbing capacity beyond the standards
announced today and work continues on this issue in the
Financial Stability Board and relevant Basel Committee work
streams.
The Basel Committee and the FSB are developing
a well integrated approach to systemically important financial
institutions which could include combinations of capital
surcharges, contingent capital and bail-in debt.
In
addition, work is continuing to strengthen resolution regimes.
The Basel Committee also recently issued a consultative
document Proposal to ensure the loss absorbency of regulatory
capital at the point of non-viability.
Governors and
Heads of Supervision endorse the aim to strengthen the loss
absorbency of non-common Tier 1 and Tier 2 capital instruments.
Transition arrangements
Since the onset of the crisis, banks have already undertaken
substantial efforts to raise their capital levels.
However, preliminary results of the Committee’s comprehensive
quantitative impact study show that as of the end of 2009, large
banks will need, in the aggregate, a significant amount of
additional capital to meet these new requirements.
Smaller banks, which are particularly important for lending to
the SME sector, for the most part already meet these higher
standards.
The Governors and Heads of Supervision also
agreed on transitional arrangements for implementing the new
standards.
These will help ensure that the banking
sector can meet the higher capital standards through reasonable
earnings retention and capital raising, while still supporting
lending to the economy.
The transitional arrangements
include:
1. National
implementation by member countries will begin on 1 January 2013.
Member countries must translate the rules into national
laws and regulations before this date.
As of 1 January
2013, banks will be required to meet the following new minimum
requirements in relation to risk-weighted assets (RWAs):
– 3.5% common equity/RWAs;
– 4.5% Tier 1 capital/RWAs,
and
– 8.0% total capital/RWAs.
The minimum common
equity and Tier 1 requirements will be phased in between 1
January 2013 and 1 January 2015.
On 1 January 2013, the
minimum common equity requirement will rise from the current 2%
level to 3.5%.
The Tier 1 capital requirement will rise
from 4% to 4.5%.
On 1 January 2014, banks will have to
meet a 4% minimum common equity requirement and a Tier 1
requirement of 5.5%.
On 1 January 2015, banks will have
to meet the 4.5% common equity and the 6% Tier 1 requirements.
The total capital requirement remains at the existing
level of 8.0% and so does not need to be phased in.
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.
2. The regulatory adjustments (ie deductions
and prudential filters), including amounts above the aggregate
15% limit for investments in financial institutions, mortgage
servicing rights, and deferred tax assets from timing
differences, would be fully deducted from common equity by 1
January 2018.
3. In particular, the regulatory
adjustments will begin at 20% of the required deductions from
common equity on 1 January 2014, 40% on 1 January 2015, 60% on 1
January 2016, 80% on 1 January 2017, and reach 100% on 1 January
2018.
During this transition period, the remainder not
deducted from common equity will continue to be subject to
existing national treatments.
4. The capital
conservation buffer will be phased in between 1 January 2016 and
year end 2018 becoming fully effective on 1 January 2019.
It will begin at 0.625% of RWAs on 1 January 2016 and increase
each subsequent year by an additional 0.625 percentage points,
to reach its final level of 2.5% of RWAs on 1 January 2019.
Countries that experience excessive credit growth should
consider accelerating the build up of the capital conservation
buffer and the countercyclical buffer.
National
authorities have the discretion to impose shorter transition
periods and should do so where appropriate.
5. Banks
that already meet the minimum ratio requirement during the
transition period but remain below the 7% common equity target
(minimum plus conservation buffer) should maintain prudent
earnings retention policies with a view to meeting the
conservation buffer as soon as reasonably possible.
6.
Existing public sector capital injections will be grandfathered
until 1 January 2018.
Capital instruments that no
longer qualify as non-common equity Tier 1 capital or Tier 2
capital will be phased out over a 10 year horizon beginning 1
January 2013.
Fixing the base at the nominal amount of
such instruments outstanding on 1 January 2013, their
recognition will be capped at 90% from 1 January 2013, with the
cap reducing by 10 percentage points in each subsequent year.
In addition, instruments with an incentive to be
redeemed will be phased out at their effective maturity date.
7. Capital instruments that do not meet the criteria for
inclusion in common equity Tier 1 will be excluded from common
equity Tier 1 as of 1 January 2013.
However,
instruments meeting the following three conditions will be
phased out over the same horizon described in the previous
bullet point:
(1) they are issued by a non-joint stock
company;
(2) they are treated as equity under the
prevailing accounting standards; and
(3) they receive
unlimited recognition as part of Tier 1 capital under current
national banking law.
8. Only those instruments issued
before the date of this press release should qualify for the
above transition arrangements.
Phase-in arrangements for
the leverage ratio were announced in the 26 July 2010 press
release of the Group of Governors and Heads of Supervision.
That is, the supervisory monitoring period will commence 1
January 2011; the parallel run period will commence 1 January
2013 and run until 1 January 2017; and disclosure of the
leverage ratio and its components will start 1 January 2015.
Based on the results of the parallel run period, any final
adjustments will be carried out in the first half of 2017 with a
view to migrating to a Pillar 1 treatment on 1 January 2018
based on appropriate review and calibration.
After an
observation period beginning in 2011, the liquidity coverage
ratio (LCR) will be introduced on 1 January 2015. The revised
net stable funding ratio (NSFR) will move to a minimum standard
by 1 January 2018.
The Committee will put in place
rigorous reporting processes to monitor the ratios during the
transition period and will continue to review the implications
of these standards for financial markets, credit extension and
economic growth, addressing unintended consequences as
necessary.
The Basel Committee on Banking Supervision
provides a forum for regular cooperation on banking supervisory
matters. It seeks to promote and strengthen supervisory and risk
management practices globally.
The Committee comprises
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 Group of Central Bank Governors and Heads of
Supervision is the governing body of the Basel Committee and is
comprised of central bank governors and (non-central bank) heads
of supervision from member countries. The Committee’s
Secretariat is based at the Bank for International Settlements
in Basel, Switzerland.
To learn more you
may visit:
www.basel-iii-accord.com
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