Top UK Banks May Need Extra $79 Billion As Basel 4 Emerges

By Mani
Updated on

The top eight U.K. banks could need to hold extra £50 billion ($79 billion) as the outline of Basel 4 emerges, KPMG warned in its recent report.

Top UK Banks May Need Extra $79 Billion As Basel 4 Emerges

Basel 3 implementation to safeguard banks

Though regulators across the world have fast-tracked the Basel 3 implementation to safeguard banks against financial crisis, KPMG feels Basel 4 may emerge from the mist.

Basel III by 2019

KPMG feels even though the original implementation deadline for Basel 3 is still a far-distant 2019, there are some strong signals that we are already moving beyond this to the emergence of next iteration of the capital standards framework, or Basel 4.

Triple effect causes need for $79 billion

KPMG feels the demand for an additional $79 billion was based on the U.K. banks’ end 2012 positions. This was triggered by a more conservative treatment of risk weighted assets, higher estimates for future losses and the introduction of a 3 percent leverage ratio.

As reported earlier, the eight biggest U.S. banks will need to hold twice as much equity capital as required globally under a new rule launched by the U.S. regulators on July 9, intended to protect taxpayers from any future costly bailouts. The rule launched by the country’s three main banking regulators would impose a so-called leverage ratio—a hard cap on how much banks can borrow to fund their business—requiring them to hold equity capital equal to 6 percent of total assets.

This new requirement from the local regulators have prompted KPMG to rightly point out that some countries are already moving beyond Basel 3 by requiring banks to hold capital buffers to absorb the impact of stress test, over and above the Basel 3 minimum capital standards, and setting a minimum leverage ratio above 3 percent.

KPMG sounds warning

KPMG partner Giles Williams  feels the higher capital requirements could equate to an additional £50 billion that the U.K.’s largest eight banks would need to hold. This would be on top of the £260 billion they already need to set aside under Basel 3.

KPMG doubts whether in the current challenging and uncertain market conditions, it would be possible for the banks to raise such a large amount. The report concludes that in the event of failing to raise this amount, deleveraging would be the only logical option left to the banks.

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