Basel Committee Publishes Results of Basel III Monitoring Exercise

The Basel Committee has published the results of its Basel III monitoring exercise, a study based on rigorous reporting processes set up by the Committee to periodically review the implications of the Basel III standards for financial markets, and ultimately their corporate clients.

The latest publication follows the first results of the exercise based on June 2011, for which data was published in April this year. A total of 209 banks participated in the study, including 102 Group 1 banks (those with Tier 1 capital in excess of €3bn and are internationally active) and 107 Group 2 banks (all other banks).

While the Basel III framework sets out transitional arrangements to implement the new standards, the monitoring exercise results assume full implementation of the final Basel III package based on data as of 31 December 2011; meaning that they do not take account of the transitional arrangements such as the phase-in of deductions. No assumptions were made about bank profitability or behavioural responses, such as changes in bank capital or balance sheet composition. For that reason the results of the study are not comparable to industry estimates.

Based on data as of 31 December 2011 and applying the changes to the definition of capital and risk-weighted assets, the average common equity Tier 1 capital ratio (CET1) of Group 1 banks was 7.7%, compared with the Basel III minimum requirement of 4.5%. In order for all Group 1 banks to reach the 4.5% minimum, an increase of €11.9bn CET1 would be required. The overall shortfall increases to €374.1bn to achieve a CET1 target level of 7.0% including the capital conservation buffer; this amount includes the surcharge for global systemically important banks where applicable.

As a point of reference, the sum of profits after tax and prior to distributions across the same sample of Group 1 banks in 2011 was €356bn. Compared to the June 2011 exercise, the aggregate CET1 shortfall with respect to the 4.5% minimum for Group 1 banks has reduced by €26.9bn. At the CET1 target level of 7.0%, the aggregate CET1 shortfall for Group 1 banks has reduced by €111.5bn.

For Group 2 banks, the average CET1 ratio stood at 8.8%. In order for all Group 2 banks in the sample to meet the new 4.5% CET1 ratio, the additional capital needed is an estimated €7.6bn. They would have required an additional €21.7bn to reach a CET1 target 7.0%; the sum of these banks’ profits after tax and prior to distributions in 2011 was €24bn.

The Committee also assessed the estimated impact of the liquidity standards. Assuming banks were to make no changes to their liquidity risk profile or funding structure, as of December 2011, the weighted average Liquidity Coverage Ratio (LCR) for Group 1 banks would have been 91% (compared to 90% for 30 June 2011) while the weighted average LCR for Group 2 banks was 98%. The weighted average Net Stable Funding Ratio (NSFR) is 98% for Group 1 and 95% for Group 2 banks.

These ratios also assume that the Committee makes no revisions to the liquidity standards as a result of the current observation period for the LCR. Banks have until 2015 to meet the LCR standard and until 2018 to meet the NSFR standard, which will reflect any revisions following each standard’s observation period.

As noted in a January 2012 statement issued by the Group of Governors and Heads of Supervision, the Committee’s oversight body, modifications to a few key aspects of the LCR are currently under investigation but will not materially change the framework’s underlying approach. The Committee is working to finalise its recommendations in these areas by around the end of the year.

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