Most of the media coverage of the implementation of Basel III has focused on the Tier 1 common equity ratio, which is a risk-based capital ratio.
Risk-based means that a bank's assets are weighted by perceived risk. For example, cash has a zero risk weighting. Loans have risk-weightings based on loan-to-value ratios and whether or not the payments are current. Bonds have risk-weightings based in part on ratings.
The minimum Tier 1 common equity ratio for large banks is 7% under Basel III, with additional requirements for "globally systemically important financial institutions," or GSIFIs. Based on determinations by the Basel Committee, the additional capital surcharges for Citigroup (C) and JPMorgan Chase (JPM) are 2.5%, so each of these banks has a fully phased-in minimum Basel III Tier 1 common equity ratio requirement of 9.5%.
The Leverage Ratio Is DifferentThe Tier 1 leverage ratio is not risk-weighted, and analysts differ on how much of an effect the FDIC's move will have on the big banks. According to KBW analyst Brian Kleinhanzl, among eight of the nation's largest banks, only Wells Fargo had an estimated supplementary Basel III Tier 1 leverage ratio above 6% as of March 31. Of course, at that time, it wasn't yet known that the large holding companies would be required to maintain Tier 1 leverage ratios of 5%, with their bank subsidiaries facing the 6% requirement. According to Kleinhanzl, Wells Fargo had $23.4 billion in excess capital, based on his firm's estimates. Here are the shortfalls for full compliance with supplementary Basel III Tier 1 leverage requirements, calculated by KBW:
- Bank of America would need an additional $25.3 billion in Tier 1 capital to achieve full compliance with the FDIC's proposed 6% Basel III supplementary Tier 1 leverage requirement.
- Citigroup would need an additional $38.9 billion in Tier 1 capital.
- JPMorgan Chase would need $48.9 billion in additional Tier 1 capital.
- Bank of New York Mellon (BK) would need $8.0 billion in additional Tier 1 capital.
- Goldman Sachs (GS) would need an additional $18.8 billion.
- Morgan Stanley (MS) would need an additional $25.4 billion.
- State Street (STT) would need $3.1 billion in additional Tier 1 capital to comply with the FDIC's proposal, according to KBW.
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