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Top U.S. Banks Face $100 Billion Basel Gap

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The biggest U.S. banks will be short between $100 billion and $150 billion in equity capital after the new Basel III global bank regulations are imposed, with 90% of the shortfall concentrated in the biggest six banks, according to Barclays Capital.

The Financial Timesreports that the Barclays’ study assumes the banks will need to hold top-quality capital equal to 8% of their total assets, adjusted for risk.

This 8% tier-one capital ratio, a key measure of bank strength, provides a one-point cushion against falling below the effective global minimum of 7% set in September by the Basel Committee on Banking Supervision.

The paper says that the Basel III reforms will hit banks in two ways – by gradually tightening the definition of what counts as tier-one capital; and by forcing banks to increase the risk adjustment for big swathes of their businesses.

The Times notes banks can respond by increasing their capital through retained earnings or equity issuance or they can cut their risk-weighted assets through sell-offs and by cutting back on risky business lines.

So far most analysts believe the big U.S. banks will not be forced to raise capital just for regulatory purposes. But some people worry sharp cuts in assets could force banks to curb lending to the real economy or raise borrowing costs.

“These shortfalls are entirely manageable . . . The more difficult question is what effect the new rules will have on the cost and availability of credit and bank profitability,” Tom McGuire, head of the Capital Advisory Group at Barclays, told the Times.

He estimates that U.S. banks can cut their equity needs by $10 billion with every $125 billion reduction in risk-weighted assets.

Analysts say it is hard to predict the impact of the reforms on U.S. banks because they have to apply Basel III risk-weighted asset changes, as well as an earlier Basel II set of rules that European banks have been following for years.


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