A lot happened in the world of capital requirements. The next items attempt to summarize the key developments.
Publication of Final Basel III Rules
On December 16, 2010, the Basel Committee on Banking Supervision (“BCBS”) published its final rules in relation to the Basel III capital and liquidity requirements for banks. As expected, capital requirements will be substantially increased and phased in between 2013 and 2015. The minimum amount of common equity (shares, share premium, and retained earnings) that a bank will have to hold will be increased to 4.5% of risk weighted assets (“RWAs”) from the existing 2%. New regulatory adjustments will also be phased in and will require certain items to be fully deducted from capital, making the effect of the revised capital requirements even more stringent. Additional tier 1 capital investments meeting strict loss absorbency and other criteria will be permitted to form part of the overall total tier 1 capital requirements, which will rise to 6% of RWAs by 2015. The total amount of tier 1 and tier 2 capital to be held by a bank will remain at 8% of RWAs but the rules relating to what constitutes tier 2 capital will also be tightened. Tier 3 capital will be abolished. In addition to these minimum requirements, a capital conservation buffer comprising common equity of up to 2.5% of risk weighted assets will need to be built up by banks as an additional reserve for times of stress. To seek to curb excess credit growth, an additional counter-cyclical capital buffer can also be imposed on banks. Other important changes are also introduced under Basel III, including the introduction of a leverage ratio requiring tier 1 capital to be at least 3% of total gross exposures, and two new liquidity ratios that will require banks to hold liquid assets to cover obligations falling due over a 30-day period and a longer one-year period. Visit our Regulatory Reform webpage at http://www.mofo.com/resources/regulatoryreform/#basel.