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Are global banks in better shape thanks to Basel III?

The results of the latest Basel III monitoring exercise have been published by the Basel Committee. It is the eighth in a series of reports by the committee, intended to periodically monitor the effects and dynamics of the reforms and provide a benchmark for analysis.

The September report is based on data as of 31 December 2014, gathered from 221 banks (and their national supervisors), which were divided into two groups: 100 'group 1' banks (internationally active with Tier 1 capital of more than €3 billion) and 121 'group 2' banks (all other banks).

The report found that all large internationally active banks meet Basel III risk-based minimum and Common Equity Tier 1 (CET1) target capital requirements.

The report states:

  • all the 'group 1' banks meet the Basel III risk-based capital minimum requirements as well as the CET1 target level of 7.0% (plus the surcharges on global systemically important banks - G-SIBs - as applicable);
  • between 30 June and 31 December 2014, 'group 1' banks reduced their capital shortfalls relative to the higher Tier 1 and total capital target levels;
  • the additional Tier 1 capital shortfall has decreased from €18.6 billion to €6.5 billion and the Tier 2 capital shortfall has decreased from €78.6 billion to €40.6 billion.

The report also found that 85% of all the banks in the sample had a liquidity coverage ratio (LCR) of 100% or more and 98% of the banks reported an LCR at or above 60%. The LCR is a 'buffer zone' of bonds that banks are obliged to hold, so they can withstand market shocks for one month without outside help. Basel III's LCR requirements came into effect on 1 January 2015 and the minimum requirement is currently set at 60%. This will rise to 100% in 2019.

Reuters hailed the report as reassurance that “the world's 100 biggest banks all meet the tougher capital requirements agreed during the financial crisis and are closer to complying with new liquidity rules”.

CTMFile take: 100 of the world's biggest banks are complying with Basel III's minimum capital requirements and CET1 target levels and are reducing their Tier 1 and Tier 2 capital shortfalls significantly. This is good news for the banks, which are under huge pressure to comply, and for the safety of the financial system as a whole. But it means corporates will find it increasingly difficult to access credit from banks in future – many corporates fully realise this and are looking carefully at alternative financing and improving their working capital cycles.

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