BASEL III NORMS FOR TOP-UP CAPITAL IN CONTINGENCIES

The Basel III norms mandate that banks will have to set aside buffers of 2.5 per cent each for capital conservation and a top-up counter-cyclical capital.

Addressing Bancon 2010, Mr B. Mahapatra, Chief General Manager-in-charge, RBI, said this would not warrant additional capital infusion and would have to be set aside from net profit. This would be over and above the eight per cent capital adequacy ratio maintained by the banks as per the existing Basel II norms.

This would mean that banks would have to maintain 10.5 per cent and any shortfall would be have to made good from the net profit. Dividends can be distributed only after fulfilling the criteria.

On counter-cyclical capital buffer, this would be a rarest of rare occurrences and its applicability could be once in 10-20 years, whenever the economy is in a downturn as in the global meltdown in 2008. Conceding that this would be a double whammy for Indian banks as capital is needed for asset creation and for compliance to new reforms, besides also enabling financial inclusion. He ruled out any relaxation in the norms as it would have an adverse impact on the letters of credit issued by Indian banks and also their standing as counterparty banks.

Implementation

Banks will have enough time to adhere to the Basel–III norms as it needs to be implemented over six years.

The Basel III norms expected by end December or early January are macro oriented and account for systemic risk management unlike the earlier ones. Hence they seek more quality capital or capital in the form of equity and not Tier 2 or 3.

It also intends to harmonise the definition of capital across geographies-- all countries would have to follow the same rules for Tier 1, 2, 3 capital. The norms would also have indepth coverage of risk. The rules also cap excessive growth by capping the leverage ratio (tier 1 capital /total assets) at three. The gearing ratio in the US was 1:50 or 50 times during the credit crisis, Mr Mahapatra said. The new norms are also expected to introduce new liquidity standards for banks which would in turn improve the quality of supervision by regulators and bank disclosures.

SOURCE: http://www.thehindubusinessline.com/2010/12/04/stories/2010120453320300.htm