The UK banks would need another £50 billion in order to comply with extra capital requirements to be placed over and above of the incoming ‘Basel III’ package of global banking regulations, acccording to KPMG.
KPMG said the introduction of a ‘leverage ratio’ that requires banks to hold a minimum level of capital against their total assets, and restrictions on the way banks calculate the ‘risk-weighted’ assets which figure in regular capital adequacy ratios could together trigger the £50 billion demand by the banks.
Though regulators across the world have fast-tracked the Basel 3 implementation to safeguard banks against financial crisis, KPMG feels Basel 4 may emerge from the mist.
Giles Williams, partner in Financial Services at KPMG, said: "The outlines of ‘Basel 4’ are already becoming visible, five years before the technical implementation deadline for Basel 3.
This new requirement from the local regulators have prompted KPMG to point out that some countries are already moving beyond Basel 3 by requiring banks to hold capital buffers to absorb the impact of stress test, over and above the Basel 3 minimum capital standards, and setting a minimum leverage ratio above 3%.
KPMG feels that the higher capital requirements could equate to an additional £50 billion that the UK’s largest eight banks would need to hold, on top of the £260 billion they already need to set aside under Basel 3.
The banks may need to boost capital levels as the outline of Basel 4 emerges and regulators look to restrict the size of their balance sheets and scrutinize the way they measure risk.
KPMG’s £50 billion estimate is based on a common equity leverage ratio of 5% and a 20% increase in banks’ risk-weighted assets, as regulators scrutinize banks’ internal models, thereby boosting capital ratios.
"An over-reliance on standardised risk weightings or a non-risk sensitive leverage ratio could have perverse consequences. It could encourage banks to hold relatively more riskier assets and could increase significantly the cost of funding a portfolio of lower risk-weighted assets, such as mortgages.
"It is important to take account of the linkages between the Basel 3 minimum capital and liquidity requirements and the additional demands on these scarce resources arising from the multiple regulatory reform initiatives running in parallel to Basel 3," he added.