Friday, April 13, 2012

Biggest banks in EU may need 17% Tier I capital ratio

Showing they have learned nothing from the current regulatory inspired credit crunch, Eurozone policymakers are talking about requiring the EU's biggest banks to have a 17% Tier I capital ratio.

Until such time as banks are required to provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposure details, bank Tier I capital is, as the OECD said, meaningless.

Reaching for higher levels in the absence of ultra transparency can however create a credit crunch.  This has been demonstrated by the credit crunch currently going on in the Eurozone as banks try to reach the 9% Tier I capital ratio by June 30, 2012.

According to a Bloomberg article,

Europe’s biggest banks may need to hold core-capital reserves of as much as 17 percent under plans being weighed by European Union lawmakers. 
The region’s parliament is considering allowing regulators to impose capital surcharges of as much as 10 percent of a bank’s assets, weighted for risk, according to a set of suggested compromises on a draft law prepared by Othmar Karas, an Austrian lawmaker guiding the adoption of global bank-capital and liquidity rules. 
The surcharges would be on top of standard requirements that lenders hold core reserves of 7 percent and would be applied to banks “in the highest category of systemic relevance,” according to the document, obtained by Bloomberg News. 
Governments and lawmakers in the 27-nation EU are considering rules for lenders that would go far beyond international agreements approved by the Basel Committee on Banking Supervision....
Large lenders “pose a threat to the stability of the financial system as a whole,” Karas said in an e-mail. An additional capital buffer should rein in lenders from taking “too much risk,” he said. “In the end, taxpayers’ money must not be at stake when bailing out banks.”...
Under the suggestions drafted by Karas, 10 percent surcharges will be imposed “if this is justified by exceptional circumstances such as the size of the banking group in relation to the economy of the home country or the degree of concentration in the domestic financial market,” the document said.

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