Basel III: Less Than Half of Nations Meet Deadline For New Bank Capital Rules

Less than half of the 27 countries subject to new rules that force banks to hold extra capital to strengthen their balance sheets against another credit crisis met a crucial deadline at the beginning of this year.

Signalling another bump in the road for the new "Basel III" capital requirements, the Basel Committee on Banking Supervision revealed only 11 member jurisdictions met the deadline, while the remaining 16 are said to be publishing the final set of Basel III regulations in early 2013.

The nations that met the deadline include Australia, Canada, China, Hong Kong, India, Japan, Mexico, Saudi Arabia, Singapore, South Africa and Switzerland.

The Committee said that seven other jurisdictions - Argentina, Brazil, the European Union, Indonesia, Korea, Russia and the United States - have issued draft regulations, and "have indicated they are working towards issuing final versions as quickly as possible."

Turkey will issue draft regulations early in 2013.

Basel III rules essentially require banks to hold more capital or for stockholders' money to absorb losses in the event of another financial crisis.

Even though there are delays in implementing the regulations, the Basel Committee's chief assured the market that national supervisors are ensuring that internationally active banks are, where necessary, making steady progress in strengthening their capital base in accordance with the Basel III framework.

"While some jurisdictions have not been able to meet the planned start date, a large number will be ready to begin introducing the new capital requirements as planned on 1 January 2013. The globally agreed timeline includes a number of milestones from 2013 to 2019, designed to provide for a gradual phasing in of the new capital requirements," says Stefan Ingves, Chairman of the Basel Committee and Governor of the Sveriges Riksbank.

"It is expected that as remaining jurisdictions finalise their domestic regulations during 2013, they will incorporate all the remaining transitional deadlines in line with the original global agreement, even where they have not been able to meet the 1 January 2013 start date Hence, by the end of 2013, almost all Basel Committee jurisdictions will be implementing Basel III in accordance with the agreed timetable. This is an absolutely critical step towards strengthening the resilience of the global banking system," he adds.

The Crossroad for Capital Requirements

Basel III commitment rules that the minimum requirement for banks' tier-one capital ratio (ratio of equity capital to risk-weighted assets [RWA]) has been raised from 2 percent to 4.5 percent and is effective as of 2019.

Lenders will also need to add a "conservation buffer" of 2.5 percent, meaning banks must hold a total core capital equal to 7 percent of their RWA.

In mid-December, the Basel Committee met to discuss the progress of its members in implementing the capital adequacy reforms within Basel III and said it was actively monitoring on a continuing basis the progress of members in implementing the package of regulatory reforms, as well as the implementation of Basel II and Basel 2.5.

However, over the last few months of 2012, a number of central bank chiefs have criticised the new rules for banking capital requirements.

The Bank of England (BoE) released a report last year, which argued that the existing mathematical models that banks use to determine how much capital they need, can include millions of variables and make it more difficult for examiners to review.

Meanwhile, European Central Bank president Mario Draghi also warned that such stringent capital requirements will choke interbank lending and hurt economic recovery.

Ingves has vehemently denied these claims and said there is no hard evidence of such damaging side effects.

In December last year, the US' Federal Deposit Insurance Corporation (FDIC) and the BoE also issued a joint paper highlighting an emergency action plan for making the biggest banks as solvent and "less risky" as possible.