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A showdown looms over bank capital rules 

November 25, 2016

The Economist

In Santiago on November 28th and 29th the committee of central bankers and supervisors from nearly 30 countries that draws up global bank capital standards is due to thrash out revisions to Basel 3, the version agreed on after the financial crisis of 2008. European (and some Asian) bankers and officials fear additional capital requirements are coming; Americans are all for the changes. Stand by for a standoff in Chile.

Spurred by Basel 3, banks have stuffed billions into capital cushions that the crisis showed to be woefully thin. Between mid-2011 and the end of last year, 91 leading lenders bolstered their common equity by €1.4trn ($1.5trn), or 65%, according to the Bank for International Settlements (BIS), which provides the Basel committee’s secretariat. The ratio of equity to risk-weighted assets, an important regulatory gauge, climbed from 7.1% to 11.8%. Although Basel 3 need not be fully honoured until 2019, most banks are far above the minimum of 4.5% (additional buffers, some at national level, raise the actual floor much higher).

But the committee has been taking a closer look at banks’ calculations of risk-weighted assets. It has concluded that banks’ internal models vary too much: in an exercise in 2013, in which it asked 32 lenders to assess the required capital ratio for the same hypothetical credit portfolio, the highest answer was four percentage points above the lowest. Some banks, it believes, are too sanguine about credit risk. Read more

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