Banking beyond Basel

Source : Business Standard / New Delhi September 14, 2010, 0:40 IST

The Reserve Bank of India (RBI) has every reason to pat itself on the back as far as its policy on prudential and capital adequacy norms for banks is concerned. 


The new Basel- III norms, agreed upon by central bankers from the major economies of the world and to be considered by heads of government at the next Group of 20 summit, will only be catching up with already existing norms in India as far as capital adequacy goes.


 While Basel III requirement is that Tier 1 (equity capital and disclosed reserves) capital ratio be 6 per cent, in India it is already well above this. 


As RBI governor Duvvuri Subbarao said last week, as on June 30 the capital adequacy ratio of the banking system stood at 13.4 per cent, of which Tier-I capital accounted for 9.3 per cent. The new Basel-III norms introduce a new concept called capital conservation buffer (CCB). This will be an additional 2.5 per cent on top of the new 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 CCB will include equity, after deductions like deferred taxes. This new buffer is proposed to be phased in from January 2016 and will be fully effective in January 2019. In addition, it has also been proposed that there would be a counter-cyclical capital buffer, amounting to between 0 and 2.5 per cent of equity or other full loss-absorbing capital. It is aimed at forcing banks to build up an extra buffer when banks see excessive credit in the system that may pose a threat to bank bottom lines.


 Banks would then be able to tap this buffer to offset any potential losses without having to raise fresh capital immediately. 


No timeline has been yet fixed for this new concept to be introduced.


Other ideas proposed include new definitions of capital aimed at improving both the quantity and quality of bank capital. It is reiterated that the predominant form of Tier-1 capital must be equity and retained earnings. To this, banks can include deferred tax assets, mortgage-servicing rights and investments in financial institutions to an amount no more than 15 per cent of the common equity component.


The new norms also impose a ceiling on build-up of leverage in the banking sector. It is hoped that this would reduce the risk of destabilisation from deleveraging. There are also new liquidity norms aimed at ensuring that banks have enough liquid assets to tide over short-term shocks and medium to longer-term pressures. 


These and other proposals pertaining to risk are aimed at ensuring that the banking sector is better protected from the macroeconomic and financial consequences of excess credit and leverage. 


It is surprising, however, that the timetable laid out for adherence to Basel III is far too stretched out. 


There is good reason to insist on a shorter time span and early implementation of these norms.


 One reason why banking stocks have done so well on Monday could be that western banks feel less intimidated by this liberal timetable.

India must continue to remain a step ahead......

Indian banks may not need more capital for Basel-III

Source : B S Reporter: Mumbai,sep.14,2010

Most Indian banks are sufficiently capitalised and unlikely to need additional capital in the near term to meet the Basel-III norms approved by the Basel Committee on Banking Supervision (BCBS) on Sunday. But emphasis on core capital and a conservation buffer could put pressure on banks’ return on equity, said some analysts.



BCBS recommended that Tier-I capital, which includes common equity and other financial instruments, will have to be increased to six per cent from four per cent. It suggested raising the minimum common equity capital requirement from two per cent to 4.5 per cent by January 1, 2015.

As on June 30, 2010, the aggregate capital to risk weighted assets ratio of the Indian banking system stood at 13.4 per cent, of which Tier-I capital was 9.3 per cent, according to the Reserve Bank of India (RBI) data.


This is well above the six per cent Tier-I capital ratio mandated in the Basel-III norms. However, the standards mandate a minimum common equity of seven per cent, including a capital conservation buffer of 2.5 per cent. 




This may be a challenge, especially for public sector banks, which rely more on perpetual debt instruments to shore up their Tier-I capital, say analysts.
The conservation buffer is intended to achieve, what BCBS says, “The broader macro-prudential goal of protecting the banking sector from periods of excess aggregate credit growth.”


“There is no significant impact on Indian banks at this point in time. Current capitalization of top banks in India won’t require them to increase core capital significantly,’’ said Vibha Batra, co-head for Financial Sector Ratings at ICRA Ltd. “Although some public sector banks —which have the government support in the form of preferential shares for non-core Tier-1 capital — may need to strengthen their core capital.’’


“At present, public sector banks have a larger component of perpetual debt (and hence higher leverage) and lower Tier-1 ratios in general compared to private sector banks. Hence, a quicker transition to Basel-III will impose relatively greater capital requirements on them if they have to maintain current levels of growth,” according to a note from Macquarie Equities Research.
Bank of India and Union Bank of India have the lowest core Tier-1 ratios (less than 7.5 per cent). 


The core Tier-1 ratio of private sector banks is 13 per cent-plus on an average. The new norms will be implemented between January 1, 2013, and January 1, 2015. The Bankex was up 3.62 per cent to close at 1,3454.56 points. One of the biggest gainers was the country’s largest lender, State Bank of India, which rose 5.5 per cent to '3,147.25, a record high. ICICI Bank rose 4.4 per cent to '1,097.30.


Return on Equity

Analysts say the proposed norms may pose a challenge to growth and sustainable return on equity over the longer term as leverage reduces. “A higher core Tier-1 ratio, coupled with a conservation buffer of 250 basis points, could impact growth. It could result in lower leverage, implying lower sustainable return on equity” Macquarie group said in a research note.


 “The new common equity norms will place premium on efficient use of capital,’’ said Monish Shah, senior director with Deloitte Consulting. “It will make banks risk sensitive and realign exposure for better use of capital.’’


“Most Indian banks have a minimum core Tier-I ratio of seven per cent, so banks are comfortable on that count,” said a senior executive of the country’s third largest lender, Axis Bank. “What we are more concerned about is the liquidity standards.’’


The Basel-III norms involve two regulatory standards for managing liquidity risk — a liquidity coverage ratio to ensure resilience over the short term and a net stable funding ratio to promote resilience over the longer term. “


The major challenge for Indian banks lies in implementing the liquidity standards as they have limited capability to collect the relevant data accurately and granularly, and to formulate and predict the liquidity stress scenarios,” RBI Governor D Subbarao had said in a speech in Mumbai last week before the Basel-III norms were finalised.

IMF head says Basel falls short on bank supervision

Source :Reuters / Milan September 14, 2010, 12:25 IST

The proposed Basel III bank capital rules go in the right direction but need

 to be completed by a strengthening of banking supervision,

 the head of the International Monetary Fund said on Tuesday.

"There was an absolute need to remodel the rules of the financial sector...

 this, at the moment, is much more important than potential negative 

effects on growth that could come from the increase in regulation," 

Dominique Stauss-Kahn said in an interview in Italy's  Il Sole 24 Ore.

But the IMF head said supervision is more important. 

"My worry is we have made progress on the rules front...

 but there is still a lot to do on the other questions".

Strauss-Kahn also said the economic crisis will not end 

until unemployment has been reduced substantially.