Basel III Capital Ratio Requirements Chop More Than $1 Trillion From European Bank Assets: European Banking Authority

on December 17 2013 12:35 PM
euro zone
File photo of a huge euro sculpture in front of the headquarters of the European Central Bank (ECB) in Frankfurt, Jan. 1, 2002. Reuters

New bank regulations designed to prevent a global financial crisis like the one that hit international markets in 2008 have resulted in European banks losing more than $1 trillion of their assets in the past two years, according to the European Banking Authority (EBA).

In compliance with the new bank regulations, known as Basel III, the risk-weighted assets of European banks were cut by 817 billion euros ($1.1 trillion) from December 2011 to June 2013, while core tier 1 capital rose by more than 80 billion euro in the same period, according to the EBA report, which was released Monday. The capital ratio is a measure of how well banks can cushion heavy financial losses, and it rose to 11.7 percent from 10 percent.

Basel III is intended to reduce financial risk and improve bank transparency, partly by preparing banks for massive economic shocks. Implementation is slow but ongoing.

“Banks are reducing their risk-weighted assets as they move into the world of Basel III capital requirements,” Mediobanca SpA analyst Christopher Wheeler told Bloomberg. “The leverage ratio has since hit them square between the eyes.”

Previously the EBA performed annual “stress tests” on banks. In 2014, though, the European Central Bank will take over the task of supervising EU banks, measuring the quality of bank assets in a three-stage review. Sovereign debt exposure, held by European banks against European countries, came to 1.647 trillion euro as of June 2013, according to the report.

Government debt owned by local banks increased sharply, partly attributable to a 1 trillion-euro stimulus injection two years ago, reported the Financial Times.

The data covered 64 banks across 21 countries, including major European banks like Deutsche Bank AG (ETR:DB1) and Barclays PLC (LON:BARC). A Basel III supervisory committee published a fresh report on market risk and bank trading on Tuesday, days after U.S. regulators approved the Volcker Rule, which curbs risky bank proprietary trading. 

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