Japanese banks must bolster core capital ratios

The Yomiuri Shimbun (Sep. 15, 2010)
Japanese banks must bolster core capital ratios
銀行新規制 邦銀は自己資本の充実を急げ(9月14日付・読売社説)

The Basel Committee on Banking Supervision, comprised of central bankers and supervisors from major countries, agreed Sunday on a new framework for calculating minimum core capital requirements for leading financial institutions.

The new regulations decided on by the Switzerland-based committee are meant to compel banks to ensure sounder management, to prevent any repeat of the international financial crisis.

Based on the new rules known as Basel III, Japan's three megabanks will have to increase their core capital as soon as possible.

A bank's capital adequacy ratio indicates the amount of core capital it has to cushion potential losses, as a percentage of loans and other assets. A higher capital adequacy ratio means a bank has a greater capability to deal with risk.

The new rules require banks to increase the core tier 1 capital, such as common stock and retained earnings, that they must hold in reserve, to at least 4.5 percent of assets, from the current 2 percent.
They also have to build a separate capital conservation buffer equivalent to 2.5 percent of assets. This makes the total top-quality capital requirement even higher--at least 7 percent of assets.

The new rules will be phased in from 2013 and take full effect in January 2019.


Early proposals too strict

Proposals were initially floated in the committee that the minimum core tier 1 capital ratio be set between 6 and 8 percent and introduced in 2012 because the United States and Britain, which have suffered greatly from the credit crisis, demanded stricter requirements.

However, Japan, Germany and some other countries opposed this, saying that tightening regulations too quickly would cause a credit squeeze and negatively affect the real economy.

Although the worst of the financial crisis is over, the future of the global economy is still uncertain. The U.S. economy is quickly slowing down and Europe is still suffering from the financial crisis.

If regulations on bank capitalization had been tightened quickly as the United States and Britain demanded, banks might have started forcibly calling in loans and lowering loan assets to improve their capital adequacy ratios.

We think it an appropriate conclusion that the tighter requirements initially proposed were relaxed and that banks were given longer-than-expected transition periods before the new rules will be implemented.

It was a bitter lesson when banks in the United States and some European countries fell on tough times due to the credit crisis and were bailed out with taxpayers' money. With the introduction of the more stringent rules, banks must improve their own strength to weather business crises, and not casually depend on taxpayer bailouts.


Tough road ahead

Attention is now focused on how Japanese banks, including the three megabanks, will deal with the new rules.

The core tier 1 capital ratios of Mizuho Financial Group, Sumitomo Mitsui Financial Group and Mitsubishi UFJ Financial Group are said to be between 5 and 7 percent. The Financial Services Agency said Japanese banks will be able to meet the new international rules before the requirements are tightened.

However, there is no easy way for Japanese banks to meet the requirements while competing fiercely with gigantic foreign rivals. They must increase their core capital ratios by reviewing management strategies and steadily making profits.

(From The Yomiuri Shimbun, Sept. 14, 2010)
(2010年9月14日01時25分 読売新聞)

by kiyoshimat | 2010-09-15 05:49 | 英字新聞

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