- The most important part of the agreement covers “core” Tier 1 equity. For all practical purposes, you can think of this as real capital that can’t be monkeyed around with too much by clever accountants — in other words, it mostly means cash and government bonds. The old standard was 2%. The new standard is 7% (4.5% plus a 2.5% “conservation buffer”). In addition, during times of credit expansion, it goes up to 9.5%, and “systemically important” banks (i.e., really big banks) are expected to have even more. So figure that big banks will be required to carry core capital of about 11% or so when the economy is strong. That’s a 5x increase over the old requirement.
- Likewise, ordinary Tier 1 capital requirements will also increase. When you add everything up, the requirement for big banks during economic booms goes up from 4% to about 12%.
- The whole thing will be phased in between 2013 and 2018.
I don’t touch on banking issues often, but the Basel III international banking standards have attracted a lot of attention in the industry, mainly because the Basel accords are the banking equivalent of the European capital standards being set in Solvency II – an international standard that creates a peg for country regulators to attach their standards to.
Reuters gives some perspective:
- European banks, especially in Spain and Germany, will have to raise money to meet the standard. Deutsche Bank already plans to raise €10 billion.
- At 6.3%, Japanese banks already approach the 7% standard.
- Most banks in Asia, the United States, Canada, the Benelux and Nordic countries, Britain and Switzerland already meet the standard.
Which all explains why banking stocks rose 1.7% in Europe today – standards weren’t as high as feared.