UPDATE 3-Final Basel reform goes to oversight body

Tue Sep 7, 2010 1:34pm EDT

* Final Basel III package heads for Sunday endorsement

* Germany appears unhappy with final recommendations

* Banks to hold 9 percent Tier 1 including buffer - report

* Analysts, regulators expecting core 6 percent Tier 1

(Adds German source on meeting)

By Huw Jones

LONDON, Sept 7 (Reuters) - Central bank and regulatory officials agreed tougher new global bank capital rules on Tuesday but will keep investors on tenterhooks about the details until Sunday when formal endorsement is expected.

The Basel Committee ended its meeting with recommendations on how much extra capital banks will have to hold in future to avoid governments having to bail out the sector in the next crisis, a source familiar with the process said.

It also agreed arrangements for phasing in higher standards on the quality of capital banks must hold in future.

"The Basel Committee has said they are on track with their discussions but there will be no announcement today," a committee spokeswoman said without elaborating further.

The recommendations will be put to the Group of Governors and Heads of Supervision, chaired by European Central Bank President Jean-Claude Trichet, which meets in the Swiss town of Basel on Sunday.

Germany had held back from endorsing prior changes to Basel III, hoping to win concessions on issues such as giving its state-backed banks more time to upgrade the quality of a form of non-voting bank capital known as "silent participations," widely used in the country.

However, a German source familiar with the talks said: "What has been decided was not a consensus but a paper that most of the members said would be a good compromise."

The so-called Basel III reform is the cornerstone of the world's response to the financial crisis and endorsement by Basel's oversight body will pave the way for the G20 meeting in November to give their seal of approval.

Germany's Die Zeit newspaper reported on Monday that a draft of the package showed banks would have to hold Tier 1 capital of 9 percent, including a 3 percent so-called "conservation buffer".

At least 5 percent of Tier 1 would have to be in the form of pure equity or retained earnings for maximum market shock absorbency. The current Tier 1 ratio minimum is 4 percent, with a core pure equity minimum of 2 percent. [ID:nLDE6851V2]

The leak sparked some skittishness in Europe's stock market as investors refocused on how much capital banks may need to raise and how this might hit dividend payments. [.EU]

ONEROUS END

Germany continued to press for more time to implement the changes so its banks do not have to raise huge amounts of capital quickly.

"We want a tightening of the rules ... (but) the financial sector must be in a position to continue to carry out its business," German Finance Minister Wolfgang Schaeuble said. But Germany gave up trying to win blanket regulatory recognition for "silent participations".

"That battle is hopeless," said one source familiar with the talks, adding that the participations would no longer count as core capital at joint-stock companies, while savings banks and landesbanks without a joint-stock corporate structure would need to meet a raft of new requirements to use them. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ European CDS widen as capital fears resurface [ID:nLDE6860JZ] BREAKINGVIEWS on Basel's capital buffer plan [ID:nLDE6860SJ] Q&A on Basel III rules finalisation [ID:nLDE6850Q0] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

Analysts and regulators have been expecting the new levels to come in at around 6 percent for core Tier 1, with a conservation buffer of at least 2 percent. [ID:nLDE6850Q0]

Any bank that failed to keep above the capital conservation buffer would have to curb payouts such as bonuses and dividends.

Andrew Lim, an analyst at Matrix Group said the minimum ratios outlined in the newspaper leak were at the more onerous end of what the market had been expecting once the additional buffers were added.

"This, we believe, is incrementally negative and is one of the reasons why the market is weak today," Lim added.

"Our analysis shows that BBVA (BBVA.MC), HSBC (HSBA.L), Intesa Sanpaolo UPIB.SJ, Unicredit (CRDI.MI) and Barclays (BARC.L) would still be at risk of being in the conservation buffer even by year-end 2013," Lim said.

Banking and regulatory sources confirmed the Die Zeit figures but said it was unclear if the figures were final.

"If the new core minimum is 5 or 6 percent then that looks good. A majority of European banks would be definitely above that level," said Antonio Ramirez of Keefe, Bruyette & Woods.

Analysts said much of the impact would hinge on what quality capital banks would be expected to hold in their extra buffers.

The Group of 20 leading countries agreed earlier this year that its original end of 2012 deadline should include wiggle room for countries to have more time to comply. (Additional reporting by Alexander Huebner, Angelika Gruber and Jonathan Gould in Frankfurt and Noriyuki Hirata in Tokyo; Editing by Sharon Lindores)

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