Big Oops: "The Aggregate Shortfall Of Required Stable Funding Is €2.78 Trillion"

Tyler Durden's picture

For today's dose of sobering cold water we go to the Bank of International Settlements, best known for being the FX bid (and gold offer) of last resort, whose Quantitative impact study results published by the Basel Committee has some very bad news for long-term bank viability: "The Committee also assessed the estimated impact of the liquidity standards. Assuming banks were to make no changes to their liquidity risk profile or funding structure, as of June 2011, the weighted average Liquidity Coverage Ratio (LCR) for Group 1 banks would have been 90% while the weighted average LCR for Group 2 banks was 83%. The aggregate LCR shortfall is €1.76 trillion which represents approximately 3% of the €58.5 trillion total assets of the aggregate sample. The weighted average Net Stable Funding Ratio (NSFR) is 94% for both Group 1 and Group 2 banks. The aggregate shortfall of required stable funding is €2.78 trillion." You read that right: as of June 30, banks lacked €1.76 trillion in liquid assets, and needed €2.78 trillion to meet stable funding rules. And then Europe imploded.

Full report:

Quantitative impact study results published by the Basel Committee

12 April 2012

The Basel Committee published today the results of its Basel III monitoring exercise. The study is based on rigorous reporting processes set up by the Committee to periodically review the implications of the Basel III standards for financial markets. A total of 212 banks participated in the study, including 103 Group 1 banks (ie those that have Tier 1 capital in excess of €3 billion and are internationally active) and 109 Group 2 banks (ie all other banks).

While the Basel III framework sets out transitional arrangements to implement the new standards, the monitoring exercise results assume full implementation of the final Basel III package based on data as of 30 June 2011 (ie they do not take account of the transitional arrangements such as the phase in of deductions). No assumptions were made about bank profitability or behavioural responses, such as changes in bank capital or balance sheet composition. For that reason the results of the study are not comparable to industry estimates.

Based on data as of 30 June 2011 and applying the changes to the definition of capital and risk-weighted assets, the average common equity Tier 1 capital ratio (CET1) of Group 1 banks was 7.1%, as compared with the Basel III minimum requirement of 4.5%. In order for all Group 1 banks to reach the 4.5% minimum, an increase of €38.8 billion CET1 would be required. The overall shortfall increases to €485.6 billion to achieve a CET1 target level of 7.0% (ie including the capital conservation buffer); this amount includes the surcharge for global systemically important banks where applicable. As a point of reference, the sum of profits after tax and prior to distributions across the same sample of Group 1 banks in the second half of 2010 and the first half of 2011 was €356.6 billion.

For Group 2 banks, the average CET1 ratio stood at 8.3%. In order for all Group 2 banks in the sample to meet the new 4.5% CET1 ratio, the additional capital needed is estimated to be €8.6 billion. They would have required an additional €32.4 billion to reach a CET1 target 7.0%; the sum of these banks' profits after tax and prior to distributions in the second half of 2010 and the first half of 2011 was €35.6 billion.

The Committee also assessed the estimated impact of the liquidity standards. Assuming banks were to make no changes to their liquidity risk profile or funding structure, as of June 2011, the weighted average Liquidity Coverage Ratio (LCR) for Group 1 banks would have been 90% while the weighted average LCR for Group 2 banks was 83%. The aggregate LCR shortfall is €1.76 trillion which represents approximately 3% of the €58.5 trillion total assets of the aggregate sample. The weighted average Net Stable Funding Ratio (NSFR) is 94% for both Group 1 and Group 2 banks. The aggregate shortfall of required stable funding is €2.78 trillion.

Banks have until 2015 to meet the LCR standard and until 2018 to meet the NSFR standard, which will reflect any revisions following each standard's observation period. As noted in a January 2012 press statement issued by the Group of Governors and Heads of Supervision, the Basel Committee's oversight body, modifications to a few key aspects of the LCR are currently under investigation but will not materially change the framework's underlying approach. The Committee will finalise and subsequently publish its recommendations in these areas by the end of 2012.

Banks that are below the 100% required minimum thresholds can meet these standards by, for example, lengthening the term of their funding or restructuring business models which are most vulnerable to liquidity risk in periods of stress. It should be noted that the shortfalls in the LCR and the NSFR are not additive, as reducing the shortfall in one standard may also reduce the shortfall in the other standard.

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GetZeeGold's picture

 

 

Here....we'll just write you a check for that.

 

Zero Govt's picture

you can almost hear the counterfeiting (wealth) machines being fired up in Western central banks

GetZeeGold's picture

 

 

No QE.......we promise.....and this time we're really serious!

 

MillionDollarBonus_'s picture

This report is completely inaccurate I'm afraid. Way too exaggerated and overextremist. European banks are actually in good shape and are positioned to prosper from the global recovery.

LynRobison's picture

Hopium is a powerful hallucinogen, which causes all sorts of delusions such as a belief in a nonexistent economic recovery and unjustified confidence in European banks. 

GCT's picture

MDB your posts are lacking humor these days.  Have you run out of good humor for ZH.  I would prosper too if I could get free money every time I needed some to pay off my debts.  Maybe we ought to have the Fed and the ECB pay off all of the taxpayers debt and start over.  Get the treasury to issue trillion dollar coins and eliminate the federal deficit and wallah no more debt and everyone is now free to create more debt and spend like crazy to create more growth.  The GDP would go up and everything would be solved.

Your losing your touch MDB.

Carl Spackler's picture

MDB, you are so wrong.

Sometimes, it is better to just keep quiet, so you don't prove out that you really know nothing.

I have done financial modelling of Basel III for global banks in the study, and I am not surprised by the results, AT ALL.

 

 

 

 

 

MeelionDollerBogus's picture

MDB informs us that Obama has the budget under control.

What more could you ask?

:D

Carl Spackler's picture

"Here....we'll just write you a check for that."

Note that by writing a check, GetZeeGold, you just depleted the liquid funding of one bank (simultaneously lowering BOTH its Liquidity Coverage Ratio and its Net Stable Funding Ratio) and increased the Liquidity Coverage Ratio of another bank (but not necessarily increased its long-term Net Stable Funding Ratio)!

You robbed Peter but didn't fully get all the benfits of doing so transferred over to Paul (with respect to Basel III).

Just another example of Bernanke and friends in the Ivory Tower of Basel (i.e., the modern day Tower of Babel, mind you) continuing to make up new regulations to cover up their past management failures while not thinking through the future ramifications and behavioral effects.

Before God comes and strikes them down, however, the real question I have is whether Ben Bernanke is playing the role of Nimrod ?

swissaustrian's picture

Let the ECB print it.

resurger's picture

yet, LCR high stock of liquid asset Gov.Bonds should have 0% haircut (i.e. Government Bonds)

 

 

100% Liquid= PSIs, CACs & dud CDS's

 

 

 

 

maxw3st's picture

Looks like LTRO 3 should be coming along around June 5.

SheepDog-One's picture

'Banks are 'under-funded' by $2.78 trillion Euros and have until 2018 to get funded'... pffft WTF? Whatever.

ElvisDog's picture

Problem is these international/Euro entities lie so often that my first reaction is to disbelieve anything they write and to make me wonder what the ulterior motive is.

bank guy in Brussels's picture

It says above, « The study is based on rigorous reporting processes set up by the Committee ... »

Ha! LOL

Vince Clortho's picture

2.78 Trillion shortfall?

Not a problem.  The CBs have a variety of tools to deal with nuisances like this.

1.  Print 2,780,000,000,000 single Euro Notes.

2.  Bernanke could write a single check for the equivalent amount of FRNs and loan it to them.

3.  One of the secretaries at the ECB could make a digital deposit entry of 2.78 Trillion.

That's just a few of the tools they have available.   These boys don't have advanced degrees in economics for nothin'.

Schmuck Raker's picture

Don't leave out the easiest 'solution' - simply suspend Basel I/II/III requirements.

Carl Spackler's picture

Yes, suspending the new, theoretical and unproven liquidity measurement requirements the Basel Committee on Banking Supervision assumes eveyone needs is the REAL ANSWER to this most academic of issues !

There is a real-world disconnect when every cenral bank is printing, and the study shows banks don't have enough liquidity. Clearly, the theory is incorrect.

 

spekulatn's picture

Merely transitory.

 

The End.