Basel III looking tougher than expected
They start with a bare minimum Tier 1 capital requirement of 6%; that’s a substantial increase of 50% over the 4% minimum that holds right now. And then they get tougher. There’s also a 3% conservation buffer: essentially, if your Tier 1 capital is less than 9%, you’re constrained in what you can do; certainly you can’t pay out dividends to shareholders. On top of that, the countercyclical capital buffer is being set at another 3%, which means that in good times, healthy banks wanting to pay dividends will need Tier 1 capital of 12%.
Ah, you say, but can’t they just be clever with definitions, including all manner of dodgy-looking assets as part of their Tier 1 capital? Well, yes. So there’s a parallel set of requirements for what they’re calling Core Tier 1: essentially, pure equity. That has a minimum of 5%, plus a conservation buffer of 2.5%, plus a countercyclical capital buffer of another 2.5%.
In other words, banks will have to hold more cash on-hand in order to pay off their debts when the market turns against them. That means fewer bank failures and fewer taxpayer bailouts. If the final regulations out of Basel III are really this strong, it'll mean the administration scored a serious win against European countries that wanted much less in the way of capital requirements.
(Confused by this post? Then read this one.)
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