The oversight body of the Basel Committee on Banking Supervision (Basel Committee) — the Group of Governors and Heads of Supervision — on September 12 announced the minimum capital ratios and transition periods that will apply under the new Basel III capital adequacy framework that was proposed in December 2009 and approved by the Basel Committee, with several modifications, in July 2010. Basel III calls for national jurisdictions to begin phasing in the new capital standards beginning January 1, 2013, and the U.S. federal banking agencies have issued public statements in support of the Basel III capital standards. Basel III increases the minimum requirement for the common equity component of Tier 1 capital from 2% of risk-weighted assets (RWA), which is measured before the application of capital deductions under the current framework, to 4.5% of RWA measured after the application of stricter capital deductions required under the Basel III framework. In addition, banks subject to the new standards will be required to hold a “capital conservation buffer” of 2.5% to withstand future periods of stress, bringing the total common equity requirement to 7%. Basel III increases the minimum Tier 1 capital requirement from 4% of RWA to 6% RWA. The minimum requirement for total capital under Basel III remains unchanged at 8% of RWA.
Nutter Notes: Member countries, including the United States, must translate the Basel III capital standards into national laws and regulations so that the minimum common equity and Tier 1 capital requirements will be phased in from January 1, 2013 to January 1, 2015. The capital conservation buffer requirement will be phased in beginning on January 1, 2016 and become fully effective on January 1, 2019. Certain elements of Basel III are in conflict with current U.S. banking laws and regulations, including some provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Perhaps the most important difference is that Basel III’s narrower definition of Tier 1 capital, which includes common equity and other qualifying financial instruments based on stricter criteria than the definition of Tier 1 capital under current U.S. capital adequacy guidelines, would entirely exclude trust preferred securities. In contrast, Dodd-Frank grandfathered existing trust preferred securities at banking companies with less than $15 billion in assets, and at mutual holding companies. Dodd-Frank also exempts from its capital requirements bank holding companies subject to the Federal Reserve’s Small Bank Holding Company Policy Statement. The Basel III framework calls for certain capital instruments that would no longer qualify as Tier 1 capital (such as trust preferred securities) to be phased out over a 10-year period beginning in January 2013. Many of the details of the Basel III capital framework have yet to be determined, and Basel III will not be formally approved until the G20 Leaders summit in Seoul in November.