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Why the BCBS can’t say much about Asian lenders
The Basel III rules about new global regulatory standards on bank capital adequacy and liquidity are finally here after several twists and turns. The Basel Committee on Banking Supervision (BCBS) says that, as a result of its new definition of capital that introduces the new capital standard of common equity Tier 1 (CET1) and a modified version of what constitutes Tier 1 capital, banks’ gross common equity tier 1 ratio will drop 5.4 percentage points to 5.7% for ‘Group 1’ banks, those with Tier 1 capital of more than $4 billion, while the corresponding decline for ‘Group 2’ banks, with Tier 1 capital lesser than this amount, the drop is set to be 2.9 percentage points. In other words, the capital shortfall for Group1 lenders will fall short of anything between $220 billion at the BCBS’s prescribed lower limit of CET1 of 4.5% and $769 billion for the upper limit of 7%, as per the banks’ balance sheets at the end of 2009.

December 21, 2010 | Aditya Puri

The Basel III rules about new global regulatory standards on bank capital adequacy and liquidity are finally here after several twists and turns. The Basel Committee on Banking Supervision (BCBS) says that, as a result of its new definition of capital that introduces the new capital standard of common equity Tier 1 (CET1) and a modified version of what constitutes Tier 1 capital, banks’ gross common equity tier 1 ratio will drop 5.4 percentage points to 5.7% for ‘Group 1’ banks, those with Tier 1 capital of more than $4 billion, while the corresponding decline for ‘Group 2’ banks, with Tier 1 capital lesser than this amount, the drop is set to be 2.9 percentage points. In other words, the capital shortfall for Group1 lenders will fall short of anything between $220 billion at the BCBS’s prescribed lower limit of CET1 of 4.5% and $769 billion for the upper limit of 7%, as per the banks’ balance sheets at the end of 2009.

So what does say this number crunching exercise about lenders in Asia? Not a great deal. The global banking regulator made up of national regulators from 27 countries came up with these figures after looking at what 263 banks from 23 members countries told it about the impact of Basel III on their business. Asia was grossly underrepresented with only about a fifth of the voices coming from the region and even those comprised developed economies such as Australia, Korea, Hong Kong, Singapore on the one hand and emerging markets such as India and China on the other. Secondly, half of the Asian lenders who were a part of the reckoning fall into Group 2 so the potential decline they could face in their CET1 is limited to 2.9 percentage points, going by the BCBS’s calculation.

The Japanese banking system could be impacted the most but that is not surprising, given the fact that the country’s banks had the lowest capital levels in the region to begin with. According to the BCBS, nine of them could face a gross CET1 drop...

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Categories: Capital & Strategic Issues, Risk And Regulation Working Group
Keywords: Regulation, Liquidity Risk