Basel III Summary, And The Fed's Endorsement of 20x+ Leverage

Tyler Durden's picture

Earlier today, the Basel Committee on Banking Supervision committee released Basel III guidelines, which are expected to have a material impact on curbing bank risk appetite... when they are fully implemented in July of 2019. Luckily by then the last thing on people's minds will be whose bank's Tier 1 capital (which includes such intangible "capital" items as mortgage servicing rights and preferred stock) was being misrepresented for the past 9 years, as real cap ratios are discovered to have had a decimal comma following the zero. In the meantime, here is the summary of the proposed changes to bank capitalization requirements, which apparently were so "stringent" that the Fed issued a Sunday afternoon press release patting itself, and the entire financial system on the back, for pulling off another multi-trillion toxic debt David Copperfield disappearing act. So for the next several years, banks will need to demonstrate a stringent 4.5% Common Equity cap ratio, in other, will be allowed leverage over 20x. And this is the "stringent requirement" that has forced Deutsche Bank to sell over $12 billion in new stock to raise capital. Furthermore, the coincident take over of Post Bank will surely allow DB to terminally confuse
its investors as to what its final pro forma numbers are supposed to
represent, and, more importantly, what the unadjusted actuals really
are... Surely this example of just how woefully undercapitalized European banks are (consider the DB action a stark refutation of the "all is clear" statement proffered by the Stress Test farce from July) will be enough to get the EURUSD back to 1.30 overnight.

Basel III Sumary terms (courtesy of BiiiCPA)

A. Tier 1 Capital


Tier 1 capital ratio = 4%
Core Tier 1 capital ratio = 2%

The difference between the total capital requirement of 8.0% and the Tier 1 requirement can be met with Tier 2 capital.

Tier 1 Capital Ratio = 6%

Core Tier 1 Capital Ratio (Common Equity after deductions) = 4.5%

Core Tier 1 Capital Ratio (Common Equity after deductions) before 2013 = 2%, 1st January 2013 = 3.5%, 1st January 2014 = 4%, 1st January 2015 = 4.5%

The difference between the total capital requirement of 8.0% and the Tier 1 requirement can be met with Tier 2 capital.

B. Capital Conservation Buffer

There is no capital conservation buffer.

Banks will be required to hold a capital conservation buffer of 2.5% to withstand future periods of stress bringing the total common equity requirements to 7%.

Capital Conservation Buffer of 2.5 percent, on top of Tier 1 capital, will be met with common equity, after the application of deductions.

Capital Conservation Buffer before 2016 = 0%, 1st January 2016 = 0.625%, 1st January 2017 = 1.25%, 1st January 2018 = 1.875%, 1st January 2019 = 2.5%

The purpose of the conservation buffer is to ensure that banks maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress. While banks are allowed to draw on the buffer during such periods of stress, the closer their regulatory capital ratios approach the minimum requirement, the greater the constraints on earnings distributions.

C. Countercyclical Capital Buffer

There is no Countercyclical Capital Buffer

A countercyclical buffer within a range of 0% – 2.5% of common equity or other fully loss absorbing capital will be implemented according to national circumstances.

Banks that have a capital ratio that is less than 2.5%, will face restrictions on payouts of dividends, share buybacks and bonuses.
The buffer will be phased in from January 2016 and will be fully effective in January 2019.

Countercyclical Capital Buffer before 2016 = 0%, 1st January 2016 = 0.625%, 1st January 2017 = 1.25%, 1st January 2018 = 1.875%, 1st January 2019 = 2.5%

D. Capital for Systemically Important Banks only

There is no Capital for Systemically Important Banks

Systemically important banks should have loss absorbing capacity beyond the standards announced today and work continues on this issue in the Financial Stability Board and relevant Basel Committee work streams.

The Basel Committee and the FSB are developing a well integrated approach to systemically important financial institutions which could include combinations of capital surcharges, contingent capital and bail-in debt.
Total Regulatory Capital Ratio = [Tier 1 Capital Ratio] + [Capital Conservation Buffer] + [Countercyclical Capital Buffer] + [Capital for Systemically Important Banks]

And here is what the Fed released on a busy Sunday afternoon.

U.S. Banking Agencies Express Support for Basel Agreement

The U.S. federal banking agencies support the agreement reached at
the September 12, 2010, meeting of the G-10 Governors and Heads of
Supervision (GHOS).1 
This action, in combination with the agreement reached at the July 26,
2010, meeting of GHOS, sets the stage for key regulatory changes to
strengthen the capital and liquidity of internationally active banking
organizations in the United States and around the world.

The U.S.
federal banking agencies actively supported the efforts of the GHOS and
the Basel Committee on Banking Supervision (Basel Committee) to
increase the quality, quantity, and international consistency of
capital, to strengthen liquidity standards, to discourage excessive
leverage and risk taking, and to reduce procyclicality in regulatory
requirements.  The agreement represents a significant step forward in
reducing the incidence and severity of future financial crises,
providing for a more stable banking system that is less prone to
excessive risk-taking, and better able to absorb losses while continuing
to perform its essential function of providing credit to creditworthy
households and businesses.

Today's agreement represents a significant strengthening in prudential standards for large and internationally active banks. [TD: in other news, the subprime crisis is contained]

GHOS agreement calls for national jurisdictions to implement the new
requirements beginning January 1, 2013.  The GHOS announced that the new
numerical minimum requirements would be phased in over two years
beginning on January 1, 2013, and that certain capital deductions and
the phase-in of capital buffers would occur over time from January 1,
2014, to no later than January 1, 2019.  This transition period is
designed to give institutions the opportunity to implement the new
prudential standards gradually over time, thus alleviating the potential
for associated short-term pressures on the cost and availability of
credit to households and businesses.  Consistent with this objective,
supervisors will be evaluating an institution's capital adequacy on the
basis of the then-applicable standards as well as the strength of an
institution's plans to meet future standards as they come into effect.

U.S. federal banking agencies support and endorse the efforts of the
GHOS and the Basel Committee to strengthen the capital position of large
and internationally active banks.  The Dodd-Frank Wall Street Reform
and Consumer Protection Act requires the establishment of more stringent
prudential standards, including higher capital and liquidity
requirements for large, interconnected financial institutions. 
Moreover, the Basel Committee continues work on the development of
measures to improve the loss absorbing capacity for systemically
important financial institutions.  This work would augment the standards
announced by the GHOS today.

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AUD's picture

It will be funny when the core Tier 1 capital is actually revealed to be junk.

Is there a full list of such 'safe' assets available?

Nihilarian's picture

Yeah, that list exists on a cocktail napkin at one of FASB's ARSE (Accounting Rules Suspension Engagement) parties.

MarketTruth's picture

The Fed wants ZERO reserves!?!!?!

"Given the very high level of reserve balances currently in the banking system, the Federal Reserve has ample time to consider the best long-run framework for policy implementation. The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system" -- Federal Reserve February 10, 2010

mikla's picture

I was just sitting here this evening thinking to myself, "Self!  What the world needs is more LEVERAGE.  Wouldn't that be neato?"

I certainly don't think we have enough.  People are afraid of system instabilities now, so we should just increase the LEVERAGE so they don't have to be afraid anymore.  What could *possibly* go wrong?

unwashedmass's picture

not everyone is fooled.....rumor is the chinese are back and buying tonight in the gold market......and silver sneakin' up quietly......

some people understand its time to buy "the real".......take delivery of "the real".....and go sit quietly in a corner that's far, far, far away from the stock and bond markets.......

Saxxon's picture

Operative in 2019 you say?  Self-serving, handlicking, powerhumping technocrats.  Humping the pantleg of the Illuminati.  They are the same the world over.

tom a taxpayer's picture

Too little, too late.

The European banking system is unlikely to survive til the Jan 1, 2013 Basel BS starting gate, let alone the many years to full implementation in 2019.

Nothing. The Basel Committee on Banking Supervision did nothing that takes effect immediately. Member countries must translate the rules into national laws and regulations before this date.

Typical bankster propaganda smoke and mirrors.

AC_Doctor's picture

July of 2019?  WTF,  we will not make it to July of 2012...

Beans, bullets and band-aids boys...


Id fight Gandhi's picture

I agree. The more you read this shit the more you play for end game.

unwashedmass's picture


the most exciting thing to watch this week is going to be this going to be the week that JPM loses its ability to maintain the fantasy that silver is worth less than 20? in the face of the shortages around the world? in the face of the hordes demanding delivery from the COMEX....which the Comex may ...or MAY NOT have ......

and just how far is Ben willing to fund the effort to maintain the fantasy????

or is this one of the many times Bennie Boy is just going to give his gang of thugs the magic word, then print the money to keep silver down.....and give the bill to the US taxpayer?

I love the fact that bonds are being sold to help maintain the ongoing fraud in metals.....that my kid is going to spend her working life paying off these bonds that are being issued simply to help the largest institutions steal from investors worldwide.....

LooseLee's picture

Agreed! Silver is looking like a coiled spring about to go ballistic and gold is hanging in there!


Hall 9000's picture


George Carlin Video: The Truth About Wall Street And Washington 

"Carlin discusses education, honesty and accountability (or lack thereof) from politicians, the sickening power of Wall Street lobbyists, corporate control over Washington, regulatory capture, and political corruption.   All the themes you know and love."

Boilermaker's picture

Seriously...only 20X?  I was honestly expected much much more.

mikla's picture

It *is* much more.  Reporting is based on the "honor system", with no checks and balances, and numerous things are not subject to review (for example, we can all *assume* that all sovereign debts have no chance of default).

Leverage in reality is currently north of 40:1 (many larger institutions greater than 100:1), and banks are not required to raise capital.

This is the "new accounting rules" equivalent to the "Stress Tests".

Maniac Researcher's picture

I'm surprised no one is yet talking about the legacy of the BIS on this thread. Anybody remember Leon Fraser?

Id fight Gandhi's picture

Which part the suicide speculation?

Maniac Researcher's picture

According to local police, it was a suicide.

However, I do find the timing of his death suspect, considering he was spending an enormous amount of time and energy trying to get BIS dividend payments to US shareholders from Switzerland (when these accounts were blocked because of the Trading with the Enemy Act) right before he died. Fraser managed to secure the deal using First National Bank of NY accounts. [citation - the Thomas H. McKittrick papers at the Baker Library, Harvard Business School]

doolittlegeorge's picture

So DB owns the German Post Office now.  Exactly who can buy DB?  Is that the sound of "nobody"?  Oh, wait.  Of course...the German GOVERNMENT can "buy them."  Of course one must not speak of what DB just did as an outright nationalization lest the 2nd biggest private bank in Germany (Goldman Sachs?) decide "we have an answer for that."  Yes, yes?  Of course I'm just some stupid truck driver who may have just been given a clue as to how your daughter is gettin' her smack.  Interesting how a fisherman if willing to throw a little bait out there of his own can find that "the bad guys just open right up to the world."  Indeed "you might even be working for them."  Thank God for the police and quality narco's.  We'll see how the follow up goes.

hugolp's picture

Including the "Government sponsored agencies" as highly liquid assets is going to bring lots of pain in the future.

Expect all kind of shenanigans with all that cheap funding and then a big final crash, while politicians say that nobody saw that coming and its the market fault.

bankonzhongguo's picture

Basel III and its "2019" date merely sets the tone to nations that they need to get medieval on thier banks.  Its no mistake that the FDIC is making its road show and letting everyone know that 800 banks are on the watch list.  They want the banks to go the way of the newspapers, soda pop and the family farm.  Capital control will be the game of the land, but an interesting dynamic will be insurance companies - especially oufits like UnitedHealth Group, WellPoint and Aetna.  All that Obamacare mandates for an uncontrolled private tax to be paid to these guys means they have the capital a la government requirement to purchase a private "service" (Just what value does insurance bring to the table again?)  Don't be surprised to see a WellPoint buy BAC or Citi during the End Times and watch that measly $1 billion community bank get merged into the TBTF borg.

VeloSpade's picture

I don't care if its Basel I, II, or III...they all sound like a very rare and highly contageous venereal disease, spawned from the interbreeding of homosexuals and monkeys that first commenced in 1783, in what is now called Africa.

LMAO's picture

I was about to read the article for some in depth information on the ins and outs of the said agreement. Then it struck me.... right in the middle of the article in bold.....This was all I needed to know:


"U.S. Banking Agencies Express Support for Basel Agreement"




firstdivision's picture

Woohoo!  This is awesome news.  It means that business as usual to a total destruction in the next 2 years. 

malek's picture

Farcism in its purest form.

Great work in pointing that out, TD!

honestann's picture

None of this matters one bit.  The powers-that-be change the rules more often than most folks take a shower.  And these days, they don't even need to change the rules to permit any action that any bank might want to take.  They simply value the air inside their buildings at $37 trillion per cubic foot, add that to their "balance sheet", leverage it up 100x or so, and play, play, play.

One major reason gold will continue to shine is the growing realization that everything official is pure, unadulterated fraud... plus the observation that physical gold is 100% real.