The New Global Minimum Capital Standards Under Basel III

The New Global Minimum Capital Standards Under Basel III

by Jeremy Jennings-Mares, Oliver Ireland and Anna Pinedo


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 III.

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 reforms.

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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Jeremy 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.