Basel III Capital and Liquidity Standards: Basel Committee Calibrates Capital Standards and Establishes Phase-in Periods for Capital and Liquidity Standards

Sullivan & Cromwell LLP - September 13, 2010
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On September 12, 2010, the Group of Governors and Heads of Supervisors of the Basel Committee on Banking Supervision, the oversight body of the Basel Committee, published its “calibrated” capital standards for major banking institutions. Under these standards when fully phased-in on January 1, 2019, banking institutions will be required to maintain:

  • a Tier 1 common equity ratio of at least 7.0%, 4.5% attributable to a minimum Tier 1 common equity ratio and 2.5% attributable to a “capital conservation buffer;”
  • a Tier 1 capital ratio of at least 6.0%, exclusive of the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased-in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation); and
  • a total capital ratio of at least 8.0%, exclusive of the capital conservation buffer (which, as discussed below, is added to the 8.0% total capital ratio as that buffer is phased-in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation).

The Tier 1 common equity and Tier 1 capital ratio requirements will be phased-in incrementally between January 1, 2013 and January 1, 2015; the deductions from common equity made in calculating Tier 1 common equity (for example, for mortgage servicing assets, deferred tax assets and investments in unconsolidated financial institutions) will be phased-in incrementally over a four-year period commencing on January 1, 2014; and the capital conservation buffer will be phased-in incrementally between January 1, 2016 and January 1, 2019. The Basel Committee also announced that a “countercyclical buffer” of 0% to 2.5% of common equity or other loss-absorbing capital “will be implemented according to national circumstances” as an “extension” of the conservation buffer. The release does not address the Basel Committee’s two liquidity measures initially proposed in December 2009 and amended in July 2010 — the Liquidity Coverage Ratio and Net Stable Funding Ratio — other than to state that the Liquidity Coverage Ratio will be introduced on January 1, 2015 and the Net Stable Funding Ratio will be significantly revised and “move[d] to a minimum standard by January 1, 2018.”

The ultimate impact of the new capital and liquidity standards on individual banking institutions, the banking industry, and the broader economy will depend on a number of factors, including individual national treatment (both regulatory and supervisory), the actual amounts of any countercyclical buffer and systemic surcharge, and capital “cushions” which banking institutions may feel compelled to maintain. The Basel Committee noted that “large banks will need, in the aggregate, a significant amount of additional capital,” and it is likely that there is an aggregate substantial shortfall in meeting the Liquidity Coverage Ratio.