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Basel Committee calls for higher Tier 1 capital for banks

By Babajide Komolafe

Basel Committee on Banking Supervision, which comprise Central Bank Governors and Head of Banking Supervision units around the world, has called for higher levels and quality of Tier 1 capital for banks.

This was part of measures taken by the  Committee last week to the regulation, supervision and risk management of the banking sector.
Tier 1 capital is the core measure of a bank’s financial strength from a regulator’s point of view. It is composed of core capital, which consists primarily of common stock (ordinary shares) and disclosed reserves (or retained earnings) but may also include non-redeemable non-cumulative preferred stock.
The Committee also called for the introduction of a leverage ratio as a supplementary measure to the Basel II risk-based framework.

The Committee in a statement issued on Monday, said “The Group of Central Bank Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, met on 6th  September to review a comprehensive set of measures to strengthen the regulation, supervision and risk management of the banking sector. These measures will substantially reduce the probability and severity of economic and financial stress.

The Central Bank Governors and Heads of Supervision reached agreement on the following key measures to strengthen the regulation of the banking sector:
Raise the quality, consistency and transparency of the Tier 1 capital base. The predominant form of Tier 1 capital must be common shares and retained earnings. Appropriate principles will be developed for non-joint stock companies to ensure they hold comparable levels of high quality Tier 1 capital. Moreover, deductions and prudential filters will be harmonised internationally and generally applied at the level of common equity or its equivalent in the case of non-joint stock companies. Finally, all components of the capital base will be fully disclosed.

Introduce a leverage ratio as a supplementary measure to the Basel II risk-based framework with a view to migrating to a Pillar 1 treatment based on appropriate review and calibration. To ensure comparability, the details of the leverage ratio will be harmonised internationally, fully adjusting for differences in accounting.

Introduce a minimum global standard for funding liquidity that includes a stressed liquidity coverage ratio requirement, underpinned by a longer-term structural liquidity ratio.
Introduce a framework for countercyclical capital buffers above the minimum requirement. The framework will include capital conservation measures such as constraints on capital distributions. The Basel Committee will review an appropriate set of indicators, such as earnings and credit-based variables, as a way to condition the build up and release of capital buffers. In addition, the Committee will promote more forward-looking provisions based on expected losses. Issue recommendations to reduce the systemic risk associated with the resolution of cross-border banks.”

The Committee will also assess the need for a capital surcharge to mitigate the risk of systemic banks.
The Basel Committee will issue concrete proposals on these measures by the end of this year. It will carry out an impact assessment at the beginning of next year, with calibration of the new requirements to be completed by end-2010. Appropriate implementation standards will be developed to ensure a phase-in of these new measures that does not impede the recovery of the real economy. Government injections will be grandfathered.

vides untied grants for studies, technical assistance and capacity building for private sector projects and African institutions such as ABN. Since FAPA’s creation in 2006, Japan has contributed US$30 million while the AfDB has contributed US$ 10 million. The current grant brings FAPA’s total commitments to about US$ 21 million covering 27 projects across the African continent.


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