December 08, 2011 at 11:38 AM EST
Estimated Basel III Capital Shortfalls Could Limit US Bank Lending
Standard & Poor’s estimates that rated US banks could fall short by $330 billion to $430 billion of meeting Basel III CET1 capital adequacy minimums of 7% plus systemic buffers under certain conditions. In other words, this estimated shortfall would be met by a reduction in total assets of $4 trillion to [...]

Standard & Poor’s estimates that rated US banks could fall short by $330 billion to $430 billion of meeting Basel III CET1 capital adequacy minimums of 7% plus systemic buffers under certain conditions.

In other words, this estimated shortfall would be met by a reduction in total assets of $4 trillion to $4.8 trillion for rated US banks, or about one-third of the $12.3 trillion in assets of all US banks as of Nov. 23, 2011.

To compute this estimated shortfall, we assumed that regulators would implement the new minimum regulatory capital standards immediately, whereas regulators are planning a transition period for Basel III that ends in 2019. Three different assumptions for capital buffers explain the range of potential shortfalls:

  • A systemic buffer equal to 1.5% for the eight U.S. banks that the Financial Stability Board recently designated globally systemically important banks (G-SIBs) for Basel III, plus a 1% buffer for the non-G-SIBs with total assets greater than $50 billion.
  • A systemic buffer equal to 2% for the G-SIBs plus a 1% buffer for the non-G-SIBs with total assets greater than $50 billion.
  • A systemic buffer equal to 2.5% for the G-SIBs plus a 1% buffer for the non-G-SIBs with total assets greater than $50 billion.

Our review of capital adequacy indicates that most rated US banks will have no problem meeting the increases in minimum regulatory capital ratios by 2019. However, the eight G-SIBs constitute about 90% of our estimated shortfall for rated banks. Therefore, we expect these banks will continue retaining a significant amount of earnings, reduce the amount of risk-weighted assets (RWAs), or a combination of both to meet the fully phased-in Basel III minimums. Clearly, there is a spectrum of possible scenarios, but we highlight the following three under our base case projections of modest economic growth for the U.S. economy.

For details see US Banks: Estimated Basel III Capital Shortfalls Could Limit Bank Lending

Technorati Tags: big banks, G-SIB, U.S. banks

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