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Change to definition of capital affects bank capital shortfall, says regulator

Regulator the European Banking Authority (EBA) has said that changes to the definitions of capital and the way that assets are measured mean that the biggest international banks would fall €1.5 billion short of required capital levels if rules were fully implemented.16 Sep 2015

The EBA has published its twice-yearly report on the amount of capital that banks hold (37-page / 431KB PDF) relative to their risk-weighted assets, looking at data to 31 December 2014. Under Basel III regulations put in place following the 2008 banking crisis capital must not fall below 4.5%, but the shortfall threshold would be 7% if the Basel III regulation were fully implemented.

The common equity tier 1 capital ratio (CET1) of the largest internationally-active banks would meet the current requirement but not the 7% requirement under full implementation of the rules.

The EBA said that the shortfall has been caused by changes to the definition of capital. The estimated shortfall has decreased by 45% from €2.8bn in June 2014, the EBA said.

The average CET1 of the largest internationally-active European banks would be 11.4% under full implementation rules, compared to 12.2% under the current rules, the European Banking Authority (EBA) said.

Compared with the previous report for June 2014, the average CET level of group 1 banks increased by 0.5%, the EBA said.

For smaller banks the average CET1 ratio would fall from 13.2% under current rules to 12.4% under full implementation, the EBA said. The shortfall for these banks would be "almost zero" for the minimum requirement of 4.5%, and €2.4bn for the target of 7%.

Banking expert Tony Anderson of Pinsent Masons, the law firm behind Out-Law.com said: "While the report demonstrates that capital shortfalls in several areas still exist for the relevant  banks, these shortfalls are reducing and demonstrate healthier capital positions than previously existed for such banks."