Basel III Bank Capital Standards

by Christine A. Edwards, Jerry Loeser and Jacob F. Calvani

In September 2010, the Basel Committee on Banking announced a strengthening of existing bank capital requirements and also endorsed a proposal issued last July for an additional countercyclical capital buffer. This commentary by Winston & Strawn discusses those developments.

Excerpt:

Amid considerable international publicity, the Basel Committee on Banking Supervision's oversight body, the Group of Governors and Heads of Supervision, on Sunday, September 12, 2010, announced a strengthening of existing bank capital requirements and also endorsed a proposal issued last July for an additional countercyclical capital buffer. These two developments, along with a new global liquidity standard, will now be presented to a November Summit meeting of leaders of the G20 countries.

The day after the announcement stocks of the largest U.S. bank holding companies reacted favorably, possibly reflecting relief that the new standards were not as severe or impending as previously thought. However, the chairman of the FDIC commented that the new standards are not as high as "many of us" would have liked.

As reflected below, the announcement essentially consisted of the release of numbers, but did not explain the basis of how the numbers were reached.

Minimum Common Equity Ratio

These reforms would eventually require banks to maintain a minimum ratio of common equity to risk-weighted assets of 4.5%, phasing in by January 1, 2015 (3.5% by January 1, 2013; 4% by January 1, 2014). Simultaneously, the broader Tier 1 minimum capital ratio, which includes not only common equity but also certain preferred stock and minority investment in consolidated subsidiaries, would also increase from 4% to 6% by January 1, 2015. Increasing the minimum amount of common equity required to support risk-weighted assets reflects the strong perception on the part of bank regulators that ability to absorb loss is the most important function of capital, and common equity provides the greatest ability to absorb loss. [footnotes omitted]

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