While the implementation of the proposed Basel III rules remains on hold, U.S. banks stalled in complying with the capital standards in the fourth quarter, according to a report by industry analyst firm SNL Financial.
The banking industry’s backlash toward the proposed Basel III rules caused regulators to delay their implementation late in 2012. Critics of the proposal have focused their ire on the complexity of the rules and potential volatility they would add to their capital bases but less attention has been placed on the amount of capital the proposed capital regime would require banks to hold. The banking industry has consistently made progress in building capital levels to comply with the proposed rules, but that trend changed in the fourth quarter, according to the report.
SNL’s analysis found that while the capital bases of banks – particularly institutions with more than $15 billion in assets – seem fairly well-prepared for the implementation of Basel III, the industry’s capital shortfall to the proposed capital rules actually increased in the fourth quarter. This occurred even though banks would have benefited by including unrealized gains and losses in their regulatory capital ratios. This would occur since the Basel III rules provide for accumulated other comprehensive income (AOCI), which captures unrealized gains and losses of banks’ available-for-sale securities, to flow through regulatory capital.
The inclusion of unrealized gains and losses would have boosted regulatory capital. As interest rates have fallen and remained low through the end of 2012, banks would have experienced median increases to their Tier 1 capital on an average of about 1.93 percent a quarter over the last 17 quarters beginning in the fourth quarter of 2008, according to SNL data.
As a whole, SNL found that the group of banks under $250 billion in assets, excluding BHCs with less than $500 million in assets, would fall short of the minimum capital requirements under Basel III.
The nation’s largest banks continued to make progress toward the Basel III Tier 1 common requirements in the fourth quarter. The same cannot necessarily be said for smaller institutions.
In fact, SNL’s analysis found that smaller banks, those with less than $15 billion in assets, actually account for a significant portion of the shortfall, despite their smaller size.
Most banks with less than $15 billion in assets did not believe they would have to comply with the Basel III rules, or at the very least, believed that their trust preferred securities, which would lose their regulatory capital status under the proposed rules on a phased-out basis, would remain grandfathered as regulatory capital under the Dodd-Frank Act.
Still, even with the shortfall, the analysis found that banks falling short of the minimums should be able to build their capital to the required levels in a relatively short timeframe.
