Basel seen setting core Tier 1 at 4-6 pct - sources

FRANKFURT/LONDON Wed Aug 11, 2010 5:50pm IST

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FRANKFURT/LONDON (Reuters) - The Basel Committee will likely require banks to more than triple their quality capital under new rules set to be finalised in coming weeks, regulatory and banking sources with knowledge of the negotiations said.

The Swiss-based committee of central bankers and supervisors is in the process of crafting capital and liquidity reforms aimed at preventing future financial crises, and is on track to finalise the package in time for a G20 meeting in November.

The minimum core Tier 1 capital ratio will likely be set between 4 and 6 percent, up from the current 2 percent, according to European and Asian regulatory and banking sources, who spoke on condition of anonymity due to the sensitivity of the discussions.

The sources stressed the talks were still ongoing and subject to change.

Countries are broadly in agreement on the need for tougher guidelines but divided on the degree. Britain and the United States have argued for a higher core Tier 1 ratio while Japan, France and Germany have pushed for less stringent rules.

"Realistically the debate will likely centre on a range of 4 to 6 percent," one of the sources said.

The talks will also likely lead to an additional "capital conservation buffer" of about 2 percent that can be run down in times of economic stress and is to be composed of common shares and retained earnings -- the same components of core tier 1.

On top of that regulators are eyeing a "countercyclical buffer" of up to 2 percent to be stockpiled in good times. The new rules may allow some flexibility in the quality of capital that composes this second buffer, the sources said.

All told banks would need core Tier 1 capital of 6 to 8 percent and 8 to 10 percent of combined core Tier 1 and the countercyclical buffer, the sources said.

While big, systemically important banks already hold far more than 6 to 8 percent in high-quality capital, some Asian banks are on or below the borderline.

HSBC's core Tier 1 capital is nearly 10 percent, with Barclays at 10 percent and Standard Chartered at nine percent.

Japan's largest bank, Mitsubishi UFJ Financial Group, is at around 8 percent.

G20 leaders agreed in June that countries should have more time to fully comply with the new rules, called Basel III, than the original end of 2012 deadline pledged last year.

Compliance will be phased in and full implementation likely set around 2018, the sources said.

Globally banks have already rushed to raise capital in anticipation of the new requirements and the implementation schedule would give them time to raise more or boost capital through retained earnings.

(Additional reporting by Boris Groendahl in Vienna, and Noriyuki Hirata and Nathan Layne in Tokyo; Editing by Louise Heavens)

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