Biggest banks are weakest
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
It’s official: The biggest banks are the weakest. The Basel Committee on Banking Supervision on Thursday published its study of the impact of new global regulations, known as Basel III, on the banking industry. Had the new rules had been in place last year, the 94 largest lenders in the world would have needed 577 billion euros ($762 billion) of extra capital. It’s a reminder of just how far the biggest banks still have to go.
The Basel III rules both narrow the definition of what banks can count as part of their capital cushion and set tougher standards for how they measure their risk-weighted assets. If applied to end-2009 balance sheets, the risk-weighted assets of the biggest lenders would have been 23 percent greater than before.
These two effects make banks’ ratios of capital to risk-weighted assets look much skinnier than before. Based on last year’s figures, the 94 big banks in the Basel committee’s study would have had capital ratios averaging just 5.7 percent by the tightest commonly used definition. That’s above the committee’s absolute floor of 4.5 percent, but below the 7 percent now considered an acceptable minimum.
As for 169 smaller lenders, the study found these institutions had a relatively comfortable average capital ratio of 7.8 percent under the Basel III rules. It’s a reminder of the relative weakness of big banks — precisely those that are now deemed too big to fail.
The Basel group has leniently given banks until 2018 to comply with the new rules. They can boost their capital ratios by retaining profits, which adds to capital, and shrinking their balance sheets. If big banks cut back on pay and dividends, they could get there quicker.
In practice, though, a capital ratio of 7 percent is unlikely to be enough. Banks may have to add more cushion in good times, and regulators want bigger capital cushions at systemically important lenders, meaning large ones. Judged by the latest evidence, big banks are still a long way from safety.