Top 29 banks need to raise $566 billion to comply with Basel III norms: Fitch
17 May 2012
Fitch Ratings today said that 29 global financial institutions might need to raise approximately $566 billion in common equity to satisfy new Basel III capital rules by end-2018.
''This could restrict the ability of these institutions to increase dividends or undertake share buybacks'', the ratings agency said in a statement.
The $566 billion represents a 23 per cent increase relative to these institutions' aggregate common equity of $2.5 trillion. While full Basel III implementation will not occur until 2018, Fitch notes that global banks will face both market and supervisory pressures to meet these targets earlier.
''Banks will likely pursue a mix of strategies to address capital shortfalls, in particular retention of future earnings and selling or winding down exposures subject to higher Basel risk-weights'', said Martin Hansen, senior director, Fitch Macro Credit Research.
Once fully implemented, the stricter Basel III capital rules could imply an estimated reduction of more than 20 per cent in large banks' median return on equity (ROE), from about 11 per cent over the past few years to approximately 8-9 per cent under the new regime.
For banks that continue to pursue mid-teen ROE targets, Basel III creates potential incentives to reduce expenses further and to increase pricing on borrowers and customers where feasible, it noted.
''Since it is impossible for regulators to perfectly align capital requirements with risk exposure, some banks might seek to increase ROE through riskier activities that maximise yield on a given unit of Basel III capital, including new forms of regulatory arbitrage,'' said Hansen.
The 29 global banks, which include Barclays, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan Chase and UBS, collectively represent $47 trillion in total assets. To provide a view where these banks stand in relation to Basel III requirements, this study analyses financial reporting as of year-end 2011.
