Basel eases capital fears, top banks in spotlight

By Sakari Suoninen and Gilbert Kreijger

BASEL, Switzerland/AMSTERDAM (BestGrowthStock) – New capital rules set by global regulators brought relief to the world’s banks on Monday, giving weaker lenders time to raise funds and freeing the strong to lift dividends or hit the acquisition trail.

But the biggest international banks still face a capital surcharge on top of Basel III rules announced late on Sunday, to tackle concerns that banks deemed “too big to fail” may take risks that could derail the financial system.

“The (Basel) agreements certainly reduced probability of failure for systemically important banks, but it doesn’t resolve the moral hazard problem as these banks are too big or too interconnected to fail,” said Mario Draghi, governor of the Bank of Italy and head of the Financial Stability Board (FSB).

The surcharge drew some protests on Monday, as Societe Generale chief executive Frederic Oudea vowed to fight the proposed extra capital burden.

But investors welcomed the long phase-in of new capital standards under Basel III, shrugging off comments from one of the architects that the sector would eventually have to raise hundreds of billions of euros.

U.S. bank shares rose about 2.7 percent as executives and analysts largely dismissed the impact from the new rules. The largest U.S. banks likely will not have to resort to any near-term capital raises, Rochdale Securities Banking Analyst Dick Bove told Reuters Insider.

Pending regulatory definitions around the rules could force some U.S. banks to raise more capital, but “it appears that the American banking industry (Read more about the banking industry recovery.) meets the 2019 standards already,” he said.

U.S. banking executives appeared to agree on Monday. Bank of America Corp Chief Executive Brian Moynihan said at a Bank of America Merrill Lynch investor conference that he is a “strong supporter” of new capital rules.

Wells Fargo & Co Chief Financial Officer Howard Atkins told a Barclays Capital conference he did not expect the bank to have to make major changes. It may have to deduct certain assets against its capital, he said, but “we don’t really see at this point that this is a big deal for us.”

The release of the long-awaited rules will eliminate some of the uncertainty hanging over U.S. bank shares and curtailing returns to investors, analysts said.

“The best thing about Basel III is that it is (mostly) behind us,” NAB Research analyst Nancy Bush wrote in a note to clients on Monday.


The new Basel III requirements will demand banks hold top-quality capital totaling 7 percent of their risk-bearing assets, more than triple what they do now.

But the new capital ratio is significantly lower than what banks feared earlier this year and a long lead-in time, extending in part to January 2019, eased fears of a rush to raise capital.

Europe is the most likely region for banks to need to raise funds, notably Germany and Spain.

“It will be hundreds of billions (of euros),” European Central Bank Governing Council member and head of the Basel Committee on Banking Supervision Nout Wellink told Dutch NOS Radio 1 Journaal.

ECB President Jean-Claude Trichet said regulators struck a good balance between strengthening capital while allowing lenders to lend, but said it was “a work in progress.”

He said the more stringent requirements would not hamper global economic recovery.

Top German lender Deutsche Bank is seeking a head start on rivals such as Commerzbank by announcing plans to raise almost 10 billion euros to bolster its capital. It said it would meet the Basel III rules by the end of 2013.


Banks will not be required to meet the minimum core tier one capital requirement, which consists of shares and retained earnings worth at least 4.5 percent of assets, until 2015.

An additional 2.5 percent “capital conservation buffer” will not need to be in place until 2019.

When regulators issued an initial consultation document last year the new rules were expected to come into force by the end of 2012, but banks urged delay, citing worries that a speedy introduction would hit a fragile economic recovery.

Most banks in Asia, outside Japan, have capital levels well above the minimum levels under Basel III. Shares in Japanese banks, which have slightly lower levels, also rose.

“It’s no big bang for banks, not with a phase-in arrangement of five years,” said Commonwealth Securities analyst Craig James.

Banks that will benefit from the longer transition period were among the top gainers in Europe, with France’s Credit Agricole up 5.8 percent.

Elsewhere, many top banks in Canada, the Nordic and Benelux regions, Britain and Switzerland have a more comfortable capital cushion and clarity on Basel rules could see them become bolder in reinstating or raising dividends or seeking acquisitions, investors and analysts said.

Credit Suisse analysts saw 7 percent as the bare minimum for core Tier 1 capital, 8 percent as the standard for adequately capitalized banks and 10 percent the level at which surplus capital could potentially be returned to investors.


Swiss and British banks will be among those facing extra measures imposed on systemically important banks. That could include “combinations of capital surcharges, contingent capital and bail-in debt,” Sunday’s statement said.

French bank SocGen will “absolutely” meet minimum capital requirements, but “we will fight” the surcharge, CEO Oudea told investors at the Barclays Capital conference. He said he did not see why large banks should be particularly penalized.

The Basel III agreement was reached in Switzerland by central bank governors and top supervisors from 27 countries, after a year of horse-trading and lobbying that involved banks and governments seeking to protect their national interests.

Leaders of the Group of 20 rich and big emerging economies blamed the global credit crisis partly on risky trading by banks and demanded tougher bank capital rules.

They are set to endorse Sunday’s deal when they meet in Seoul in November and consider the FSB’s recommendations for systemically important banks.

So far there is no consensus at the G20 to back a mandatory surcharge on top of the Basel III requirements.

“These institutions need greater loss absorbing capacity,” Draghi said.

(Additional reporting by Rachel Armstrong, Maria Aspan, Lionel Laurent, Ian Simpson, Narayanan Somasundaram, Denny Thomas, Ben Lim, Aileen Wang and Taiga Uranaka; Editing by Mike Peacock and Chizu Nomiyama)

Basel eases capital fears, top banks in spotlight