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New Basel bank capital standards
Practical Law UK Legal Update 4-503-6860 (Approx. 2 pages)
New Basel bank capital standards
by Simon Lovegrove, Norton Rose
| Published on 29 Oct 2010 |
This article is part of the PLC Global Finance October 2010 e-mail update for the United Kingdom.
Speedread
On 12 September 2010, the Basel Committee on Banking Supervision announced that it had reached certain agreements that would fundamentally strengthen global capital standards. The Committee agreed to increase the minimum common equity requirement from 2% to 4.5%. Banks would also be required to hold a capital conservation buffer of 2.5% to withstand future periods of stress, bringing the total common equity requirements to 7%.
On 12 September 2010, the Basel Committee on Banking Supervision announced that it had reached certain agreements that would fundamentally strengthen global capital standards. The Committee agreed to increase the minimum common equity requirement from 2% to 4.5%. Banks would also be required to hold a capital conservation buffer of 2.5% to withstand future periods of stress, bringing the total common equity requirements to 7%. The agreement reinforced the stronger definition of capital agreed by the Committee in July and the higher capital requirements for trading, derivative and securitisation activities to be introduced at the end of 2011.
In the UK the British Bankers Association has warned that implementation of the new Basel capital requirements needs to take place "over a long timetable" and be "very carefully sequenced" to avoid prolonging the economic downturn. However, it appears that this cautious view is not shared in some other jurisdictions. For instance, the press has reported that Switzerland has already said that it would apply a "Swiss finish" to its financial sector, with its two biggest banks having to hold at least 19% in capital.
On 7 October 2010, the European Parliament issued a press release stating that an own initiative resolution on the new Basel capital requirements was passed during a plenary session. However, whilst the resolution acknowledged that the new standards tackle some of the right issues, it called for much more preparatory work before they are transposed into law. Key points in the resolution included:
- Attention must be given to the cumulative impact on banks of the new Basel standards and all other regulations currently in force or under preparation.
- The Commission should produce a comprehensive assessment of the consequences of the new standards.
- European specificities regarding corporate financing need to be taken into account in the Commission's legislative proposal.
- The Commission should look into recently passed laws in the US on the basis that these could lead to serious inequalities in the implementation of Basel II and Basel III.
- Banks need to be monitored to ensure that they do not pass on the costs of implementing Basel III to their customers.
Later this year the European Parliament will examine the Commission legislative proposal (CRD IV) to enshrine the new Basel capital requirements into EU law. The European Parliament resolution is helpful as it gives an indication as to the position the European Parliament will adopt. It is clear that whilst the Basel Committee's announcement in September was significant, there might still some way to go before Europe fully embraces it.