Fitch: G-SIBs Meet Basel III Standards Early
Fitch Ratings said its analysis shows that the global systemically important banks (G-SIBs) have essentially met their Basel III capital requirements early, with an average Basel III Tier 1 common equity (CET1) ratio of 10.1% at the end of Q3/13, according to a new report based on data available for 27 of the 29 banks. The Basel III requirements will not formally take effect until the beginning of 2019.
For the G-SIBs as a whole, the average minimum CET1 ratio requirement was 8.4%, depending on their firm-specific required capital buffers, with an average additional capital buffer of 1.7%. The average Basel III CET1 ratio was comparable across Europe, Asia and the U.S., at 10.2% for European G-SIBs, 10.1% for Asian G-SIBs and 10.0% for the U.S. institutions, Fitch said.
In a previously published study, Fitch estimated that the G-SIBs, as of end-2011, faced a cumulative capital shortfall of approximately $566 billion for each institution to reach a 10% CET1 Basel III ratio.
“For the G-SIBs, reaching an average Basel III CET1 ratio of 10% has been a multi-year effort focused on bolstering equity capital, primarily through retained earnings, and reducing risk-weighted assets,” said Martin Hansen, senior director of Fitch’s Macro Credit Research team. “An important question is whether the G-SIB’s ratio bolstering efforts will continue or if current levels represent a new equilibrium.”
Fitch said several factors could affect these ratios going forward. Skepticism around risk-weightings could have consequences, with the European Central Bank’s asset quality review potentially resulting in adjustments to risk-based capital ratios. Additionally, some G-SIBs have already announced higher target ratios well above 10%, and the implementation of the leverage ratio, if acting as a binding constraint rather than as a backstop, could also push Basel III CET1 ratios even higher. On the other hand, a potential limiting factor is the pressure for banks to satisfy investors’ return on equity (ROE) expectations, as the hurdle rate ROE for newly originated credits becomes tougher to achieve amid stricter capital requirements.
The report is entitled “Basel III Common Equity Tier 1: Early Delivery” and is available on www.fitchratings.com.