The Basel Committee on Banking Supervision has announced that the prescribed minimum capital reserve will not be fully applied until 2019.
Initial proposals would have seen banks required to hold the full reserve of cash and easily sellable assets in 2015, but banking lobbyists have won a reprieve. Now banks will be obliged to hold only 60% of that amount in 2015, with the percentage increasing by 10% per year until it reaches 100% in 2019.
The buffer is designed to ensure that, in a potential future crash, banks can last 30 days without drawing on government funds. It can be made up of assets including corporate bonds, equities and high-quality residential mortgage-backed securities (RMBS). BBC Business Editor Robert Peston has suggested that the inclusion of the latter is odd, since they proved illiquid and difficult to sell in during the crisis.
RMBS are treated as Tier-2 assets, which may account for as much as 40% of the eventual buffer. The inclusion of RMBS, albeit at a discount to value, comes with two caveats. To be counted as high quality liquid assets, they will have to be rated AA or higher, and they come with a minimum 25% haircut compared with a 50% haircut for corporate bonds, which were also also included for the first time.
Key points to have emerged since the previous revision to the LCR are:
- Banks will have to increase their core tier-one capital ratio to 4.5% by 2019.
- They will have to carry a further “counter-cyclical” capital conservation buffer of 2.5% by 2019.
- Banks must improve their transparency and disclosures.
- Any bank that fails to meet the new requirements is expected to be banned from paying dividends to shareholders until it has improved its balance sheet.