BIS notes healthier global banking system

MANILA, Philippines - As of June 2013, the shortfalls in the risk-based capital of large internationally active banks generally continue to shrink, according to a study conducted by the Basel Committee of the Bank of International Settlement (BIS).

In other words, the world’s banks in general are moving towards a healthier banking system based on higher capital versus products, exposures, also known as risks.

The BIS is generally perceived as the central bank of the central banks worldwide.

A total of 227 banks participated in the current study, comprising 102 large internationally active banks (“Group 1 banks”, defined as internationally active banks that have Tier 1 capital of more than €3 billion) and 125 Group 2 banks (i.e., representative of all other banks).

Philippine banks fall under the Group 2 banks category.

At the Common Equity Tier 1 (CET1) target level of seven percent (plus the surcharges on G-SIBs as applicable), the aggregate shortfall for Group 1 banks is €57.5 billion, compared to €115.0 billion on Dec. 31, 2012.

However, the aggregate shortfall of CET1 capital with respect to the 4.5-percent minimum has increased to €3.3 billion, which is €1.1 billion higher than previously. As a point of reference, the sum of after-tax profits prior to distributions across the same sample of Group 1 banks end June 2013 was €456 billion.

Likewise, the capital shortfall for Group 2 banks included in the sample is estimated at €12.4 billion for the CET1 minimum of 4.5 percent and €27.7 billion for a CET1 target level of seven percent.

“This represents an increase compared to the previous period of €1 billion and €2.1 billion, respectively, which is caused by a small number of Group 2 banks within the sample,” the report stated.

The sum of Group 2 banks after-tax profits end June 2013 was €26 billion. Average CET1 capital ratios under the Basel III framework across the same sample of banks are 9.5 percent for Group 1 banks and 9.1 percent for Group 2 banks.

This compares with the fully phased-in CET1 minimum requirement of 4.5 percent, and a CET1 target level of seven percent.

Basel III’s liquidity coverage ratio (LCR) will come into effect January 2015. The minimum requirement will be set initially at 60 percent and then rise in equal annual steps to reach 100 percent in 2019.

The weighted average LCR for the Group 1 bank sample was 114 percent on end June 2013, down from 119 percent six months earlier.

The Basel Committee report said that the average LCR for Group 2 banks increased from 126 percent to 132 percent. For banks in the sample, 72 percent reported an LCR that met or exceeded a 100-percent minimum requirement, while 91 percent reported an LCR at or above a 60-percent minimum requirement.

Basel III also includes a longer-term structural liquidity standard – the net stable funding ratio (NSFR).

In January 2014, the committee published a consultative document on proposed revisions to the NSFR. While the most recent Basel III monitoring exercise collected NSFR data, the results were based on the original version of Basel III’s NSFR as published in December 2010.

The next Basel III monitoring exercise, which will be based on December 2013 financial data, will include data related to the proposed revisions to the NSFR.