BIS survey underlines banks´ progress

Banks have made further progress in readying themselves for stricter incoming capital requirements, according to the latest survey from the Bank of International Settlements (BIS).

BIS claimed all banks surveyed had met the Basel III minimum and target capital requirements, which were agreed from 2015.

Banks also appeared to be making strides to be meeting the stricter requirements that are due to come into effect in 2019 and 2022.

Improvement

The BIS survey found that the common equity tier 1 ratio (CET1) for the largest international banks had risen to 12.3% by the end of 2016 versus 11.9% six months earlier.

All Group 1 banks (defined as those with CET1 capital of more than €3 billion and internationally active) would meet the minimum CET1 capital requirement of 4.5% and the target level of 7.0%.

Likewise, the survey found no CET1 minimum or target shortfall for the smaller banks lying below Group 1.

Survey data were provided for a total of 200 banks, including 105 Group 1 banks and 95 other (Group 2) banks.

Stricter rules

Assuming stricter minimum requirements that are to be applied from 2022 for 25 global banks deemed to be “systematically important”, the survey revealed a shortfall in total loss-absorbing capacity of €116.4bn.

However, this represented an improvement of well over 100% compared with the last survey result six months earlier, when the shortfall was put at €318.2bn.

Profitability

The report noted a much stronger trend of improving profitability for banks across the rest of the world versus European banks.

From June 2011 to end-December 2016, CET1 capital more than doubled in both the Americas and the rest of the world.  In Europe, the increase was at around 57%.

“The rise in overall CET1 capital among Group 1 banks appears largely due to profits generated, with particularly large profits shown by banks in the United States and China,” said BIS.

Trading book

Rule changes from 2019 are intended to tighten up the amount of capital banks must set aside to take into account risks from having stocks, bonds and derivatives on their books.

BIS said the incoming code known as the Fundamental Review of the Trading Book (FRTB) would mean the capital earmarked to cover trading risks would need to rise by 52% for large banks and around double that for smaller banks.

However, as trading currently accounts for a relatively small proportion of banking activities, the sector should only have to raise overall capital by around 2%, according to BIS.