Comments on: Basel III: The incomplete capital buffer proposal http://blogs.reuters.com/felix-salmon/2010/07/16/basel-iii-the-incomplete-capital-buffer-proposal/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: Greycap http://blogs.reuters.com/felix-salmon/2010/07/16/basel-iii-the-incomplete-capital-buffer-proposal/comment-page-1/#comment-16839 Fri, 16 Jul 2010 20:46:41 +0000 http://blogs.reuters.com/felix-salmon/?p=4753#comment-16839 The Basel proposal is complicated and I think you might do your readers a service if you were to summarize it clearly. Here is my quickie, blog-comment version:

1. There is a *minimum* tier 1 capital requirement of perhaps 4% of risk-weighted assets. A bank that falls below this level is subject to *operational intervention* by its regulator: sell assets, raise more capital, be sold to a competitor/shut down, or whatever.

2. There is a “conservation buffer” above this minimum, of perhaps 2%. A bank that is above the minimum but below the conservation level is not operationally constrained, but is constrained on how it may distribute its earnings. It is an explicit objective of the committee that these constraints should not be so onerous as to cause banks to view the conservation level as the effective minimum.

3. There is a market-specific (not bank-specific) “counter-cyclical buffer” above the conservation buffer (or you could view it as a multiplier of the conservation buffer to the same effect.) This might be another 2%, say, and it only kicks in when a period of “excess” credit growth is detected – the BIS reckons perhaps once every 20 years or so, in a given national market.

The things to be calibrated are therefore A) the minimum, B) the conservation level, C) the maximum counter-cyclical add-on, D) the credit conditions that trigger this add-on, and E) the schedule of restrictions on earning distributions as a function of where your capital level is within the buffer.

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