The Biggest U.S. Banks Face a Basel III Capital Shortfall

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When the new Basel III global bank regulations are imposed, the top 35 U.S. banks will be short between $100 billion and $150 billion in equity capital, a study by Barclays Capital finds, the Financial Times reports. Moreover, 90% of the shortfall is concentrated in the biggest six banks.

The Basel III reforms aim to increase the resilience of the global banking system to avoid another financial crisis. The reforms introduce a set of capital buffers, as well as more stringent capital and liquidity requirements. While European banks have been following Basel II for years, American banks have yet to apply those changes, and now they'll also have to implement Basel III requirements.

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Basel III requires a 7% minimum tier one capital ratio, a key measure of bank strength. The BarCap study assumes that banks will need to hold top-quality capital equal to 8% of their total assets, providing a one-point cushion.

To achieve the requirements, banks can either reduce their riskier assets (by selling some, for example) or increase capital (by issuing equity, for example). While most analysts don't believe the big U.S. banks will be forced to raise capital just for regulatory purposes, some worry that sharp cuts in assets could force banks to curb lending or raise borrowing costs, the FT adds. This could have ramifications for the economy.
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