Basel III: Chinese banks saving for new capital adequacy ratio
By Helen H. Chan
HONG KONG, Aug. 26 (Business Law Currents) – New capital adequacy rules from the China Banking Regulatory Commission (CBRC) are prompting banks to hit up investors in Hong Kong and Shanghai’s capital markets. Part of the Basel III implementation process, the rules will require Chinese lenders to shore up additional capital to protect against credit risks.
Under the new rules, which are currently open to public review, systemically important banks in China will be subject to a minimum capital adequacy ratio (CAR) of 11.5 percent; other banking institutions will be required to adhere to a minimum CAR of 10.5 percent.
ANALYSIS-Implementation key to Basel III success
By Huw Jones
LONDON, Sept 12 (Reuters) – The global “Basel III” deal on bank capital standards was reached at lightning speed by usually glacial regulators — substantive negotiations took about a year, compared to a decade for the current Basel II rules.
But implementing the new standards consistently over the lengthy phase-in period will be a headache for national regulators, and determine whether Basel III succeeds better than its predecessor in reducing bank sector risk.
* The Basel III rules are much tougher than Basel II, which failed to ensure banks held enough capital to withstand the worst financial crisis since the Great Depression.
* Although Basel III more than triples the amount of top-quality capital that banks will have to hold in reserve, there are several potential pitfalls in timing and content that could undermine the reform’s effectiveness.
* The key aspects of the completed package will not all be phased in until the start of 2019, presenting a challenge for supervisors and their political masters to maintain momentum in their supervision of the sector. Lobbying by banks or an eventual return to boom times could blunt the will to enforce Basel III, as memories of the global credit crisis fade.
* The new capital conservation buffer of 2.5 percent, which is lower than some banks had feared, will not be fully in place until the start of 2019. At this time, the buffer plus the Tier 1 capital requirement will total 7 percent; in practice this is likely to become a solid floor for banks, because they will not want to face curbs on payouts such as bonuses, dividends and share buybacks. Falling below 7 percent could damage a bank’s reputation among investors and in the money markets.
COLUMN-Stress tests and cargo cults: James Saft
(James Saft is a Reuters columnist. The opinions expressed are his own)
By Jim Saft
HUNTSVILLE, Ala., July 8 (Reuters) – How are European officials orchestrating the bank stress tests like Pacific islanders speaking into coconuts and waiting for cargo to drop from the skies?
They both make the elemental error at the heart of all cargo cults; they mistake necessity for sufficiency and hope that imitation and affect will make up for a lack of substance.
BREAKINGVIEWS – Where’s America’s home equity loan Armageddon?
– The author is a Reuters Breakingviews columnist. The opinions expressed are his own –
By Rolfe Winkler
NEW YORK, April 7 (Reuters Breakingviews) – The biggest U.S. banks hold tens of billions of dollars of underwater second-lien loans. By all rights, these look like risky credits. Lenders have managed to avoid writing them down because borrowers are making payments. But muddling through is a risky strategy. Regulators would be wise to force them to hold more capital against these loans.
In total, U.S. commercial banks hold more than $700 billion of second-lien mortgages, also called home equity loans. Many were used to turn houses into ATMs, others to finance down payments. Typically subordinate to first mortgages, many of these look vulnerable to write-downs, as the homes are worth less than debt owed on them.
Wells Fargo faces the biggest risk. Half its $124 billion home equity book eclipses the value of underlying properties. While many borrowers will pay off their loans despite their fallen values, CreditSights estimates Wells Fargo could lose $12.8 billion on the portfolio. For JPMorgan, Bank of America and Citigroup, losses could amount to $9.6 billion, $7.4 billion and $3.4 billion, respectively.
Thus far banks have escaped major home equity trauma thanks to forgiving accounting and capital treatment as well as occasionally irrational borrower behavior. For instance, stretched borrowers often make monthly payments on subordinate home equity loans despite defaulting on their first mortgages simply because the payment is lower.
Home equity charge-off rates have already increased to as much as 5 percent for big banks, yet even this understates the potential problem since they can treat loans as “performing” as long as borrowers make monthly payments.
Banks should hold more capital for risk -Santander
LONDON, Feb 23 (Reuters) – Spain’s Santander <SAN.MC>, Europe’s second biggest bank, said forcing banks to hold more capital to cover riskier activities would be better than forcing the break-up of big lenders. (more…)
Regulatory cloud hangs over bank hybrid bonds
By Jane Merriman LONDON, Feb 3 (Reuters) – European regulators want banks to boost their capital to protect against shocks but uncertainty about what type of hybrid bonds will qualify as Tier 1 capital is keeping a lid on new issues. (more…)
Turkey plans to pass capital reforms by end-March
ISTANBUL, Dec 22 (Reuters) – Turkey plans to pass a European Union-sought capital markets reform bill through parliament before the end of March at the latest, the Capital Markets Board chairman said on Tuesday. (more…)
China banks need $73 bln capital in 2010 -regulator
By Samuel Shen and Edmund Klamann SHANGHAI, Dec 21 (Reuters) – Chinese banks may need to raise about 500 billion yuan ($73 billion) from the capital markets next year as rapidly expanding loans weaken their financial strength, a senior banking regulator said, marking the first official estimate of banks’ near-term fund-raising. (more…)
BREAKINGVIEWS-FSA too weak on hybrid capital
– The author is a Reuters Breakingviews columnist. The opinions expressed are his own – By George Hay LONDON, Dec 11 (Reuters Breakingviews) – The Financial Services Authority needs to be tougher on bank capital. The UK regulator is considering allowing banks to count their current stock of hybrid securities as part of loss-absorbing reserves for another decade, and potentially longer. Such a grandfathering goes against the FSA’s policy goal of improving the quality of bank capital. (more…)
S.Korea says to guide banks to retain more profits
SEOUL, Dec 10 (Reuters) – The South Korean government will guide local banks to retain more profits next year, instead of paying dividends to shareholders, to help bolster their capital. (more…)
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On 15 August 2011 the China Banking Regulatory Commission (CBRC) released new draft guidelines regarding commercial banks’ capital requirements.
The draft guidelines set out how China aims to comply with the higher capital standards set by Basel III.
The draft guidelines set out the new, layered, capital adequacy requirements:
1. “Minimum capital requirements” for all banks: Tier 1 capital adequacy requirement of 6% (of risk weighted assets), of which 5 percentage points must be “core” Tier 1 capital; and combined Tier 1 and 2 capital adequacy ratio of 8% (of risk weighted assets)
2. In addition all banks will be required to keep a “capital conservation buffer” of 2.5%
3. systemically important banks are required to hold an additional 1% of capital; that gives a total minimum capital adequacy ratio under “normal conditions” of 11.5% for systemically important banks, and 10.5% for non-systemically important banks
4. In addition the regulator will impose an additional “countercyclical buffer” of between 0 – 2.5% during times of excessive credit growth.
George Lekatis
http://www.basel-iii-association.com