Fitch: Basel III May Cause Financials to Raise $566 Billion
In a report, Fitch Ratings estimates that, as of end-December 2011, the 29 global systemically important financial institutions (G-SIFI), which as a group represent $47 trillion in total assets, might need to raise roughly $566 billion in common equity in order to satisfy new Basel III capital rules, which represents a 23% increase relative to these institutions’ aggregate common equity of $2.5 trillion.
Fitch said although Basel III will not be fully implemented until end-2018, banks face both market and supervisory pressures to meet these targets earlier. Banks will likely pursue a mix of strategies to address these shortfalls, including retention of future earnings, equity issuance, and reducing risk-weighted assets. Absent additional equity issuance, the median G-SIFI would be able to meet this shortfall with three years of retained earnings, which might constrain dividend payouts and share buybacks.
The rating agency said this potential capital increase would imply an estimated reduction of more than 20% in these banks’ median return on equity (ROE) from about 11% (over the past several years) to approximately 8%-9% under the new regime. Basel III thus creates a tradeoff for financial institutions between declining ROE, which might reduce their ability to attract capital, versus stronger capitalization and lower risk premiums, which benefits investors.
To read the full text of Fitch Ratings report, click here.