by Jeremy Jennings-Mares, Oliver Ireland and Anna
On September 12, 2010, the
Group of Central Bank Governors and Heads of Supervision, the oversight body of
the Basel Committee on Banking Supervision ("BCBS"), issued a press
release announcing a substantial strengthening of the capital requirements, and its
full endorsement of the agreement it had reached on July 26, 2010 in relation
to the proposed reforms to the Basel II framework. These
elements are intended to form part of a package of reforms to be known as Basel
The press release contains a table summarizing the new requirements on minimum
regulatory capital and buffers, as well as a timetable for phasing in the new
The New Capital Requirements
Minimum common equity and Tier 1 capital requirements
The minimum requirement for common equity, the highest form of loss-absorbing
capital, will be raised from the current 2% to 4.5% of total risk-weighted
assets ("RWAs"). The overall Tier 1 capital requirement, comprising
not only common equity but also other qualifying financial instruments, will
increase from the current minimum of 4% to 6%.
There will be no change to the minimum total capital requirement, which will
remain at the current 8% level.
Capital conservation buffer
In addition to the minimum capital requirements, banks will be required to hold
a capital conservation buffer of 2.5%. This buffer may be used to absorb losses
during periods of financial and economic stress, but if a bank's buffer falls
below 2.5%, the bank will find itself subject to constraints on the payment of
dividends and discretionary bonuses, until the buffer is replenished. This
buffer must be funded with common equity, after application of deductions. This
effectively mandates a minimum core Tier 1 capital ratio of 7%. [footnotes omitted]
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Jennings-Mares is a partner in theMorrison & Foerster's
Capital Market practice. His practice specializes in structured products,
derivatives and structured financings, including structured notes, derivatives,
and medium-term note programs and other cross-border debt securities offerings.
He is a contributor to Covered Bonds Handbook, published by Practising
Law Institute (2010).
Oliver Ireland, a partner at Morrison & Foerster, focuses on retail
financial services and bank regulatory issues including consumer protection
rules such as Federal Reserve Regulations Z and E, the Gramm-Leach-Bliley Act
privacy provisions, the Fair Credit Reporting Act, and all types of payment
transactions, including compliance with NACHA rules. He was named one of
Washington's top banking and privacy lawyers by the Washingtonian
magazine (2004) and he has been listed in The Best Lawyers in America as
a leader in the field of banking law since 2006.
Anna Pinedo, a partner at Morrison & Foerster, has concentrated her
practice on securities and derivatives. She represents issuers, investment
banks/financial intermediaries, and investors in financing transactions,
including public offerings and private placements of equity and debt
securities, as well as structured notes and other structured products.