September 12, 2010 / 7:32 PM / 10 years ago

Factbox: Finalized Basel III bank capital ratios

(Reuters) - Central bank governors and regulators finalized a package on Sunday that will force banks to more than triple to 7 percent the amount of top quality capital they must hold to withstand shocks without state aid.

Leaders of the Group of 20 countries (G20), who called for the reform, are due to give final approval to the package in November.

The following is what the group approved on Sunday:

TIER 1 CAPITAL

This refers to a bank’s basic capital reserves, calculated according to the riskiness of the assets it has on its books.

NEW: Under Basel III, the Tier 1 capital ratio is pegged at 6 percent, with core Tier 1 at 4.5 percent.

Implementation will start in January 2013, when core Tier 1 rises from 2 percent to 3.5 percent, with full phase-in of the Tier 1 rules to be completed by January 2015.

Curbs announced in July on the use of deferred taxes and mortgage-servicing rights in Tier 1 capital will take full effect in January 2018.

Existing state capital injections into banks can be kept until January 2018.

CURRENT: Banks are currently required to have a Tier 1 capital ratio of 4 percent, with half of that, or 2 percent, dubbed “core” Tier 1 in the form of top quality capital such as retained earnings or shares, for maximum shock absorption.

CAPITAL CONSERVATION BUFFER

NEW: Basel III introduces a capital conservation buffer of 2.5 percent that will sit on top of Tier 1 capital.

Any bank whose capital ratio fails to stay above the buffer faces restrictions by supervisors on payouts such as dividends, share buybacks and bonuses.

The new buffer will have to be composed of common equity, after the application of deductions like deferred taxes.

The buffer will be phased in from January 2016 and will be fully effective in January 2019.

CURRENT: At the moment there is no capital conservation buffer.

COUNTERCYCLICAL CAPITAL BUFFER

NEW: This new buffer is set at 0-2.5 percent of common equity or other full loss-absorbing capital.

The aim of the buffer is to force banks to start building up such an extra buffer when supervisors see excessive credit in the system that threatens to spark loan losses later on. Banks would then tap the buffer to offset such losses without having to raise fresh capital immediately.

This new buffer is not expected to be introduced at the present time.

CURRENT: There is no global standard on this type of buffer.

The following refers to the rest of the Basel III package that the group of governors and supervisors agreed in July:

DEFINITION OF CAPITAL

This aims to improve the quantity and quality of capital.

The predominant form of Tier 1 capital must be common equity and retained earnings.

Banks can include deferred tax assets, mortgage-servicing rights and investments in financial institutions to an amount no more than 15 percent of the common equity component.

The capital requirement of a minority interest in a bank can be counted in the group’s capital only if the investment represents a genuine common equity contribution.

A buffer range will be established above the regulatory minimum capital requirement, and capital distribution constraints will be imposed on a bank when capital levels fall within this range.

LEVERAGE RATIO

This aims to put a cap on build-up of leverage in the banking sector on a global basis for the first time.

Will help to lessen the risk that eventual deleveraging could destabilize the sector, and introduce extra safeguards.

The leverage ratio will be calculated in a comparable manner across jurisdictions, adjusting for any remaining differences in accounting standards.

A trial leverage ratio of 3 percent of Tier 1, or balance sheets cannot exceed 33 times Tier 1 capital, is to be trialed before a mandatory leverage ratio is introduced in January 2018.

LIQUIDITY

The world’s first set of common liquidity requirements aims to ensure banks have enough liquid or cash-like assets to tide them through a very severe short-term shock and for less severe conditions in the medium to longer term.

The short-term liquidity buffer is to be mostly sovereign debt but include high-quality corporate debt.

A one-year horizon liquidity buffer, known as a net stable funding ratio, will be trialed and become mandatory in January 2018.

RISK COVERAGE

These proposals aim to strengthen capital requirements for counterparty credit exposures arising from banks’ derivatives, repo and securities financing activities.

They aim to apply capital buffers against these exposures and provide incentives to clear bilaterally traded derivative contracts in central counterparties.

There will be a risk weighting of 1-3 percent on banks’ mark-to-market and collateral exposures to a central counterparty.

The risk weighting on non-centrally cleared contracts will be higher but has not been announced yet.

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