Capital of Banks Improve But Basel Advises Them to Be More Vigilant

The capital of Australian banks has improved and yet the global regulator is not convinced that financial institutions are doing all they can to advance their plight and particularly address the unwanted disparity in banks' calculations of risk-weighted assets, reported Australian Banking and Finance.

The way these banks address their risk-weighted assets is important for the implementation of the Basel III framework, which was published ahead of the September 5-6 G-20 leaders' summit in St. Petersburg.

The Basel Committee on Banking Supervision (BCBS), which released its fourth progress report on the implementation of the Basel III framework, stated that the average common equity tier 1 capital ratio of active banks-especially those on the international scene-increased from 8.5 per cent to 9 per cent of risk-weighted assets.

The report furthered that only half of the banking industry's financial institutions will most likely fall below the required capital ratios by the 2019 requirements. The aggregate annual profit of the industry is $596 billion.

Remaining Vigilant

Although there are clear progresses in the capital of banks, the global regulator warned them to be still vigilant in light of the challenges presented by the global economic environment, a separate report in cited.

There are potential deteriorations in the banks' asset quality, and capital adjustment may be require of banks because of the need to deepen the process of the implementation of finalized capital regulations.

Currently, the global regulator is assessing the consistency of capital regulations of China, Australia and Brazil. It has recently finished reviewing that of Switzerland, which has the most secretive bank policies in the world.

These assessments are part of the BCBS' Regulatory Consistency Assessment Program (RCAP). It aims to prove that banks that absorbed and implemented the Basel III standards are stronger than those who did not.

Material Variations

There are "material variations," however, in the measurement of risk-weighted assets of these banks, the report in Australian Banking and Finance stated. The studies of the banks' risk-weighted assets in banking and trading books differ even for identical hypothetical test portfolios.

The global regulator then wants banks to improve their public information and regulatory data collection to better understand what risk-weighted assets mean. It also wants guidance and clarification regarding sectors that are usually lost to the public.

In the long run, BCBS is planning a four-policy approach, which will hopefully improve the comparability of the results of the assessments while making sure that a balance between risk sensitivity and the complexity of the Basel III framework is ensured.

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