Buffer the bank slayer

7 September 2010 By Peter Thal Larsen Follow @Peter_TL

Regulators are close to setting new minimum capital requirements for banks, including a cushion that they can dip into in bad times. But if lenders view this buffer as a minimum level that they dare not breach, the new standards could be tougher than the authorities intended.

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The Basel Committee on Banking Supervision met on Sept. 7 to finalise minimum capital rules for the banking industry.

The regulators were expected to set a new minimum ratio, as well as setting a new "capital conservation buffer" that banks can tap into during tough times. While using the buffer, banks would face restrictions on paying dividends and making acquisitions.

Regulators are also expected to discuss a countercyclical buffer, which banks are encouraged to build up in good times.

German newspaper Die Zeit, quoting a draft proposal from the Basel Committee, reported on Sept. 6 that the minimum Tier 1 capital ratio would be set at 6 percent, with a conservation buffer of an additional 3 percent. Banks could also be asked accumulate up to 3 percent more capital as part of the countercyclical buffer, taking their total ratio at the peak of an economic cycle as high as 12 percent.

Germany's banking association said that, under the proposed new rules, its 10 largest banks would require an additional 105 billion euros of capital.

Germany has resisted the proposed Basel reforms because "silent participations" a German form of nonequity capital would not count towards Tier 1 capital under the new rules.

Context News

The Basel Committee on Banking Supervision met on Sept. 7 to finalise minimum capital rules for the banking industry.

Regulators are also expected to discuss a countercyclical buffer, which banks are encouraged to build up in good times.

Germany's banking association said that, under the proposed new rules, its 10 largest banks would require an additional 105 billion euros of capital.

Germany has resisted the proposed Basel reforms because "silent participations" a German form of nonequity capital would not count towards Tier 1 capital under the new rules.

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