"Spurred by Basel 3, banks have stuffed billions into capital cushions that the crisis showed to be woefully thin. Between mid-2011 and the end of last year, 91 leading lenders bolstered their common equity by €1.4trn ($1.5trn), or 65%, according to the Bank for International Settlements (BIS), which provides the Basel committee’s secretariat. The ratio of equity to risk-weighted assets, an important regulatory gauge, climbed from 7.1% to 11.8%. Although Basel 3 need not be fully honoured until 2019, most banks are far above the minimum of 4.5% (additional buffers, some at national level, raise the actual floor much higher). [..] much: in an exercise in 2013, in which it asked 32 lenders to assess the required capital ratio for the same hypothetical credit portfolio, the highest answer was four percentage points above the lowest. [..] Where banks’ own models are used, it wants minimum values for important parameters, such as the probability that loans go bad. And it is considering an “output floor”—a lower bound for the risk-weighted sum of their assets—of 60-90% of the figure calculated under a “standardised” method. Supervisors and ministers have said that the changes should not “significantly” raise “overall capital requirements”. But some lenders can expect an increase. The proposed standardised approach, for instance, weights residential mortgages worth 60-80% of the value of the property at 35% [..] Analysts at Morgan Stanley estimate that global, non-American banks could see risk-weighted assets rise by an average of 18-30%, depending on the level of the output floor. Extra capital of €250bn-410bn could be needed, a tall order when earnings are thin and investors wary. The committee’s reviews of operational and market risks would add even more. [..] American banks will be little affected by the credit-risk proposals. They sell most mortgages to Fannie Mae and Freddie Mac, two government-owned entities, whereas European lenders keep them on the books; American companies borrow from markets rather than banks."
