Basel III bank-capital-adequacy proposals are leaving large banks feeling cold. For the 29 “systemically important” global banks, Basel (Switzerland) regulators are expected to tack on an additional 1% to 2.5% of capital cushion to the required 7% capital base (as a percentage of risk-weighted assets) required for all banks. As such, banks (assets of less than US$50 billion) not deemed “systemically important” must be champing at the bit. In the spirit of forced global deleveraging (and then some — regulators cannot be any clearer about their intentions), risk-taking is to be made more costly. Concurrently, though, sovereign policymakers want banks … Continue Reading →

Last week, the Basel Committee announced additional capital requirements for “global systemically important banks” (G-SIBs) under Basel III: Capital surcharges will be phased in beginning in 2016 and become fully effective in 2019. G-SIBs will be required to maintain between 1% and 2.5% tier-1 equity (shareholders’ equity and retained earnings) above the 4.5% tier-1 equity requirements for all banks. Five criteria — size, interconnectedness of business, cross-jurisdictional activity, lack of substitutability (a rather ambiguous term meaning that no other banks can stand in its place), and complexity — will be used to form an assessment of systemic importance. That assessment … Continue Reading →

Hybrid capital has been a popular form of capital for banks. Until recently, most national financial regulators have regarded instruments that constitute hybrid capital as Tier-1 capital, and banking institutions have found hybrid instruments a convenient way to raise capital. Hybrid instruments do not dilute common equity capital, and the distribution of profits to holders of hybrid instruments is, in most instances, tax-deductible for banks. Instruments that comprise hybrid capital have equity and debt characteristics. They can be structured to reflect a certain combination of features depending on the objectives of the bank — hybrid instruments can be perpetual or … Continue Reading →

I recently had an enlightening conversation with Herbert Broens, head of trade finance at Bayer, the German pharmaceutical and chemical multinational, on the topic of trade finance and regulation. Basel III will soon affect the way European corporate treasuries handle their trade finance business; though the outcome is uncertain, corporate executives are starting to prepare. The most significant conclusions from our conversation are summarized in this post and illustrate how regulatory dynamics are perceived by a corporate executive involved with trade finance decisions. First, a bit about trade finance. Corporate treasury executives can control their trade finance volumes with a direct impact to … Continue Reading →