On Sunday, the Group of Governors and Heads of Supervision – the governing body of the Basel Committee – ratified the new capital accord now set for implementation by the Committee next week and, then, by the G-20 in November.  U.S. regulators issued a statement endorsing the agreement without making clear when and how the U.S. will act on it – a key concern for global regulators fearful that the U.S. will shirk Basel III just as it did Basel II.  However, the Dodd-Frank Act’s tough capital requirements (see FSM Report CAPITAL167) in fact make certain that the U.S. rules will be stringent, especially for the largest U.S. banks and likely phase in more quickly than the international accord.

The latest agreement ratifies the July “annex” (see Client Report CAPITAL165), leaving intact the decision to advance a liquidity coverage ratio and defer a longer-term liquidity requirement.  The agreement does, however, delay the liquidity coverage ratio until 2015.  The final agreement hikes the minimum Tier 1 common-equity requirement from two percent to 4.5 percent, phased in by 2015.  Tier 1 including other elements will increase to six percent over the same period.  A capital conservation buffer atop this of 2.5 percent will be imposed along with a counter-cyclical charge of between zero and 2.5 percent.  Both of these charges must be comprised of loss-absorbing capital, with the counter-cyclical charge added based on national circumstances.  As in July, the agreement includes a three percent leverage requirement that will be tested as the new rules are implemented.  Additional charges for systemic institutions remain in the works.

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