Economic Indicators

A decade since Lehman Brothers bank collapsed, the world’s top lenders largely meet tougher capital requirements aimed at averting a repeat of the ensuing markets meltdown.

StockMarketNews.Today - The Basel Committee of regulators said that as of December 2017, the world's 111 biggest cross-border or "Group 1" banks would have had a collective capital shortfall of just 25.8 billion euros ($29.8 billion), had all Basel's rules been in force, a fraction of their earnings.

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The overall core equity capital ratio, which measures capital to risk-weighted assets, would have risen to 12.9 percent from 12.5 percent in June 2017, roughly triple pre-crisis levels. Basel has published regular updates on compliance with its tougher capital rules introduced in the aftermath of the crisis, but the latest assumes that a final batch of requirements agreed only last December are also in force.

The minimum versions of these additional rules won’t become mandatory until January 2022, but Thursday’s figures show banks are largely compliant years ahead of the deadline as markets pile pressure on lenders to demonstrate their financial resilience. Banks had lobbied hard to water down the additions, warning that hefty increases in capital requirements would make it harder for them to lend to businesses.

But Basel said on Thursday there was no significant increase in minimum capital requirements due to the final rules added last December. The capital shortfall does not reflect any additional capital requirements that national regulators impose. Most of a bank’s core capital buffer covers the risk of loans defaulting, but such “credit” risk has fallen significantly and now represents 65.2 percent of buffers, Basel said.

The amount of capital set aside to cover operational risks such as fines for misconduct, fraud, cyber attacks, poor internal controls and unauthorized trading, has risen sharply. It has increased from 7.8 percent at the end of June 2011 to 16.4 percent currently, Basel said. Since the financial crisis, banks have been fined billions of dollars for trying to rig interest rate benchmarks such as Libor, and currency markets.

Apart from capital, major banks must also issue a special debt known as TLAC that can be converted to capital if a crisis burns through their core capital buffer. This aims to avoid a repeat of taxpayers having to bail out lenders. When the minimum requirements for TLAC due in 2022 are applied, eight of the world’s 30 top banks have a combined shortfall of 82 billion euros, down from 109 billion at the end of June 2017, Basel said.

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