The Basel Committee on Banking Supervision’s main governing body, meeting this weekend in Basel, Switzerland, will be pulled between U.S. demands to cap the implementation period at five years and German pressure to extend it to 10 years, four people with knowledge of the talks said.

Prodded by politicians concerned about public anger over the banks’ role in the credit meltdown, regulators have proposed tighter capital rules and introduced liquidity requirements to rein in risk-taking. The rule-making has pitted countries against each other, as some including Germany say higher capital requirements will hurt their banks and curb lending at a time when global economic recovery is faltering.

“The longer time they have, the less banks will be forced to raise capital and can instead turn to earnings for replenishing capital,” said James Wiener, the New York-based head of finance and risk practice at Oliver Wyman, a management consulting firm. “Still, a lot of banks will be impacted and not all will have an easy time raising the cash they need, even through profit.”

The Basel committee has already restricted what can be counted as bank capital, which would reduce current levels by deducting assets included in the calculation, such as mortgage- servicing rights. JPMorgan Chase & Co., the second-largest U.S. bank, said last month that the Basel rules would shave its capital ratio by as much as 2 percentage points.

Tier 1 Ratio

The committee met this week to discuss a proposal calling for a minimum Tier 1 capital ratio for financial institutions of 6 percent, as well as an additional buffer of 3 percent for bad times. Tier 1 includes common equity and some equity-like debt instruments. The ratio measures the amount of capital as a percentage of assets adjusted according to their risk profiles.

While a final agreement on capital ratios hasn’t been reached, the central bank governors and chief bank regulators of 27 countries convening in Basel on Sept. 12 are expected to stick close to those numbers, three people briefed on the meeting said. A reduction of 50 basis points, or 0.5 percent, may be accepted to appease Germany, the strongest holdout against tighter standards, the people said.

Banks would also be required to hold 5 percent common equity and a buffer of 2.5 percent on top of that. The 5 percent requirement might end up at 4.5 percent, the people said.

A second buffer, which would be required during times of faster credit growth, is not expected to be determined this week. The proposal for that mechanism, called the counter- cyclical buffer, was released publicly in July, and banks have until the end of today to submit comments.

Common Equity Ratio

Under current Basel rules, the Tier 1 requirement is 4 percent. Half of that, or 2 percent, needs to be common stock. There’s no buffer requirement.

Only 3 of 18 U.S. banks analyzed by New York-based Morgan Stanley in a Sept. 8 research note would fall below the 7 percent common equity ratio. The biggest among them is Charlotte, North Carolina-based Bank of America Corp., the largest U.S. lender.

European banks are less capitalized than U.S. counterparts and may be required to raise more funds under the new Basel rules. Deutsche Bank AG, Germany’s biggest lender, is looking to sell as much as 9 billion euros ($11 billion) of stock, bankers said yesterday. Germany’s 10 biggest banks, including Frankfurt- based Deutsche Bank and Commerzbank AG, may need about 105 billion euros in fresh capital because of new regulations, the Association of German Banks estimated on Sept. 6.

‘Less Capitalized’

“The concern is bigger in Europe because their banks are less capitalized,” said Frederick Cannon, chief equity strategist at New York-based Keefe, Bruyette & Woods.

While banks will be required to raise capital to comply with the 4.5 or 5 percent common-equity minimum, they won’t have to do so to stay within the buffer. Falling below the buffer’s upper range means a bank can’t pay out dividends or buy back shares until it gets to that threshold, according to the new Basel rules. That may hurt their share prices, said Wiener of Oliver Wyman.

“An institution not paying a dividend for the next six years won’t have a great valuation,” he said.

Germany’s insistence on a 10-year transition period has been backed by only a few countries, one Basel committee member said. The rules are scheduled to go into effect in January 2013, and the transition period would start then. In effect, banks would have 12 years from now to comply if Germany gets its way.

Group of 20

Agreeing on capital ratios and a time frame will allow the Basel committee to complete most of its work on a package of reforms, with some decisions left to next month and some delayed until next year. Leaders of the Group of 20 nations will meet in November in Seoul to approve the rules.

The Basel committee has another meeting scheduled for Sept. 21-22 and said it may gather in October to finish its work.

“There are still big unresolved issues, and the devil is in the details of course,” said Paul Miller, an analyst for FBR Capital Markets Corp. based in Arlington, Virginia.

In July, the panel completed work on the definitions of capital and set a leverage ratio to apply to banks globally for the first time. Banks were given until 2018 to comply with the 3 percent leverage ratio, which measures capital as a percentage of total assets. The committee has yet to agree on revised calculations of risk-weighted assets, which form the denominator of the capital ratios to be determined this weekend.

The implementation details of a short-term liquidity ratio will also be decided by the time G-20 leaders meet, members say. The long-term liquidity rule will likely be left to next year.

The two liquidity rules would require banks to hold enough cash and easily cashable assets to meet short-term and long-term liabilities. The long-term requirement has been criticized the most by the banking industry, which claims it would force banks to sell $4 trillion of new debt.

Source >  Bloomberg