Banking Newsletter

November 2011

Bank capital rules keep on coming

Despite the Basel 3 agreement, prudential capital developments continue to emerge.

The Basel 3 rules on prudential capital may have been agreed internationally, but many areas remain to be finalised. Additional regulatory initiatives that have emerged in recent weeks further complicate matters too.

Key concerns

Amongst the many issues provoking particular discussion and discontent¹ are:

• Role of the European Banking Authority (EBA)

Under CRD 4 – which will implement Basel 3 into Europe – the EBA will have responsibility for developing binding standards in approximately 150 separate areas. This represents a considerable workload for what is still an under-resourced, fledgling organisation, and it is not clear how well it will cope.

The EBA’s proposed capital package, announced on 26 October 2011, is another contentious issue. It requires banks to build up temporary capital buffers to reach a 9% Core Tier 1 ratio by the end of June 2012 in order to address market fears around sovereign risk. Yet there is controversy over:

1. The detail of the calculation itself; and
2. The degree of additional drag it could put on economic activity

• Systemic firms surcharge

The Basel Committee has decided the surcharge for banks must be held in Common Equity, rather than less costly contingent or bail-in instruments. This is contrary to the hopes of many organisations, which will see the measure as yet another excessive burden at the current time.

• Non-equity capital

Regulators’ requirements around write-down or automatic equity conversion of non-equity capital are raising concerns around the traditional ordering of the capital structure, pricing and whether there is any investor base for such products.

• Fundamental review of the trading book

To date there is still nothing published, producing huge uncertainty about the prospective impact on banks and their operating models.

Conclusion

While considerable uncertainty remains as to the exact shape of the final prudential capital framework, areas of overlap and duplication are becoming apparent. To avoid digging up the road twice, it is crucial banks keep abreast of all the latest proposals as they emerge, and approach the changes that will result in a coordinated, strategic fashion.

¹These will be among the key issues for regulators, policymakers, industry representatives and advisers to address at the RiskMinds annual conference in Geneva in December, which will focus on risk in banking.

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