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Big banks face target capital shortfall under full application of Basel III

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Big banks face target capital shortfall under full application of Basel III

Big banks had a €23.5 billion target capital shortfall at the end of last year on the basis of fully phased-in Basel III banking rules due in 2027, the Bank for International Settlements said.

The Basel III minimum requirements on regulation, supervision and risk management were first drawn up in 2010 as a set of international banking standards created in the wake of the financial crisis on the back of previous reforms. They are due to be implemented by Jan. 1, 2022, and fully phased in by Jan. 1, 2027.

In a report published Oct. 2, BIS looked at 181 banks in total, 105 of which were large international banks including 29 global systemically important banks. The remaining 76 smaller banks have Tier 1 capital of less than €3 billion and are not necessarily internationally active.

The report found that on a fully phased in basis for Basel III requirements, the big international banks had a target capital shortfall of €23.5 billion at the end of December 2018, while the smaller banks' shortfall was €3.8 billion. The big banks' shortfall, said the BIS, is almost 75% smaller than in 2015, due mainly to higher levels of eligible capital. For the big lenders, the Tier 1 minimum required capital would increase by 3% after the final Basel III standards had been phased in relative to the initial standards.

Liquidity requirements

The bank's monitoring exercise also included an assessment of Basel III's liquidity requirements. It showed that the big banks' weighted average liquidity coverage ratio was 136.2% in December 2018, compared with 135.1% six months earlier. The net stable funding ratio, Basel III’s longer-term structural liquidity requirement, was broadly stable at 116.3% for the big banks while for smaller banks it had increased slightly to 120.0%.

For the first time, the BIS looked at the estimated impact on capital requirements from the revised market risk framework published in January 2019. The market risk framework calls for a clearly defined boundary between the trading book and the banking book, and for banks to set out separate capital requirements for risk factors that are deemed non-modelable, among other requirements.