Basel talks ease key ratios

David Walker

Australian banks are unlikely to face any problems meeting Basel III capital hurdles after several key capital ratios were eased in Tuesday’s meeting of the Basel Committee.

The committee is considering rules designed to lessen the damage from future credit over-expansions like the one that triggered the 2008 global financial crisis. (See more about the new Basel rules in Banking Day’s Basel II backgrounder.)

A proposal taken to the committee on Tuesday was reported to have set a minimum level of 6.0 per cent of risk-weighted assets for banks’ Tier 1 capital.

basel_ratio_table_201009However, Banking Day understands that the meeting compromised on a lower figure of 5.5 per cent, under pressure from nations including Germany, France, Italy and Japan. Those countries all want to reduce the pressure on their troubled banks.

Of the 5.5 per cent, 4.5 per cent will have to be “core” capital – essentially ordinary share capital and retained earnings. That figure is also 0.5 per cent lower than originally proposed.

The conservation buffer, an additional layer of Tier 1 capital required by the new rules, is now to be set at 2.5 per cent rather than the 3.0 per cent proposed to the meeting.

The result is that the total tier one capital required by Basel III is set to be 8.0 per cent rather than 9.0 per cent.

The meeting is believed not to have discussed the level of the countercyclical capital buffer, a further 2.5 to 3.0 per cent of Tier 1 capital to be required only at times of high credit growth.

The latest changes will be presented to the Group of Governors and Heads of Supervision (GHOS), chaired by European Central Bank President Jean-Claude Trichet, which meets in Basel on Sunday.

The revised numbers may well change further before the Basel III rules are scheduled to be finally agreed at the G20 meeting in Seoul in November.

But Reuters reported European Central Bank Governing Council member and Bundesbank head Axel Weber saying on Wednesday that he hoped to “bring the negotiations to a conclusion at the weekend in Basel”.

Bloomberg quoted Bundesbank Vice President Franz-Christoph Zeitler as telling reporters after the meeting that “as to the level of capital ratios, the committee has found a compromise as compared to the proposal.”

It is believed that Tuesday’s meeting split along familiar lines, with Germany, France, Italy and Japan pushing for lower ratios that would reduce the pressure on their troubled banks.

The Australian Prudential Regulation Authority said this week that Australian banks had reported an average tier one ratio of 9.2 per cent in their 2009 financial statements. Under the new rules that ratio would fall to 8.6 per cent, comfortably above the 8.0 per cent set to be required by the new Basel III rules.

For Australian banks, the sole remaining issue in the Basel III discussions is how the planned liquidity ratios will be dealt with in Australia and other countries (Singapore, Hong Kong and Saudi Arabia among them) whose low debt limits the likely future supply of government bonds.

That issue is not likely to be dealt with this month.