In other cases, regulators are pushing much further than the Basel minimums. Along with the 4.5% common equity Tier I requirement and 2.5% capital conservation buffer, Basel III requires banks to hold 1.5% in additional Tier I and 2% in Tier II capital. Assuming the full 2.5% counter-cyclical buffer is switched on, a further surcharge of between 1% and 2.5% for global systemically important banks (G-Sibs) would bring total loss-absorbing capital to between 14% and 15.5%.
In contrast, Swiss regulators want the country’s two largest banks – Credit Suisse and UBS – to hold a minimum common equity Tier I to RWA ratio of 10%, plus a further 9% in contingent convertible instruments. The UK could go even further. In September 2011, the Independent Commission on Banking (ICB) – a group set up by UK chancellor of the exchequer George Osborne to improve the stability of the UK banking system – recommended certain crucial banking functions, such as payments services, retail deposits and lending to small and medium-sized enterprises, be carved out from the rest of the group and placed in separate legal entities with their own capital.
Under the ICB plans, large retail ring-fenced banks would have a minimum loss-absorbing capacity of 17% of RWAs. This translates into a common equity Tier I minimum of 4.5% plus the 2.5% capital conservation buffer, along with the 3.5% of additional Tier I and Tier II. A new common equity ring-fence buffer of 3% will be added for the largest retail banks, along with a minimum 3.5% of so-called bail-in bonds – debt that would be written down during a resolution process. The size of the ring-fence buffer is determined by the bank’s RWAs-to-GDP ratio – if less than 1%, the bank would not have to hold the additional equity cushion.
It is absolutely vital for RWA calculations to be as transparent as possible, and for there to be proper oversight of the process so investors can make informed decisions
The ICB notes that UK investment banks should follow international rules to ensure they are not put at a competitive disadvantage – meaning these firms would be subject to Basel III. Nonetheless, the committee stresses the 17% minimum loss-absorbing capacity requirement would still apply to UK-headquartered G-Sibs. That means the largest UK G-Sibs would need to issue a minimum of 4% of loss-absorbing debt to ensure they get to the 17% figure proposed by the ICB, assuming they are subject to the maximum 2.5% G-Sib surcharge under Basel III (see figure 1).
Throw in the 2.5% counter-cyclical buffer, and a new 3% resolution buffer – which can be applied to ring-fenced banks and UK-headquartered G-Sibs if supervisors are worried about the complexity of a bank, its contribution to systemic risk, and the availability of available resolution tools – and it takes total loss-absorbing capital in the worst case to 22.5% of RWAs. As much as 15.5% of this could be common equity, as regulators can choose between equity and loss-absorbing debt for the resolution buffer.
These divergences are causing some unease within the banking industry. “We are very concerned at the amount of gold-plating and acceleration of implementation going on,” says the IIF’s Wright. “When a lot of countries go above and beyond the agreed standards and produce quite significant variations, it creates an unlevel playing field where firms face multiple versions of the same reforms on multiple different timescales. If regulators insist on treating the standards purely as minima, you run into all the problems of very different regulatory regimes that Basel III was meant to help solve.”
The Basel Committee, however, is relaxed about individual countries going further than the Basel III minimums. “Basel III is a set of minimum standards. If some countries are willing and able to implement the standards quickly or go above and beyond the standards, then that’s not a problem for the committee in any way. Countries will inevitably, over time, implement different measures over and above the original requirements to deal with particular issues,” says Wayne Byres, secretary-general of the Basel Committee.
Byres is more concerned about nations lagging behind than blazing ahead, hence the introduction of the monitoring and peer review process. But market participants fear the Basel Committee will be powerless if a large country takes its time over implementation or decides to abandon the rules entirely. The US, for instance, failed to implement Basel II on time – and some fear the same will happen with Basel III.
“US implementation is still a huge concern. The Americans won’t implement Basel III until they absolutely have to, probably much later than their European counterparts. In the meantime, there is a tonne of business going on that US banks will be able to snap up at the expense of firms in other jurisdictions,” says one senior banker.
US regulators deny they are lagging, and say a consultation document will be released this year. “We hope to have our proposed version of Basel III out in the public domain before the middle of the year. We want to get it out, get the consultation period completed and meet the timelines set down by Basel,” says Charles Taylor, deputy comptroller for regulatory policy at the Office of the Comptroller of the Currency in Washington, DC.