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Banks Must Raise $566 Billion in New Capital, Fitch Warns
Started:May 17th, 2012 (08:56 AM) by kbit Views / Replies:190 / 0
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Banks Must Raise $566 Billion in New Capital, Fitch Warns

Old May 17th, 2012, 08:56 AM   #1 (permalink)
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Banks Must Raise $566 Billion in New Capital, Fitch Warns

The world's largest banks must raise a combined $566 billion to satisfy new capital requirements, Fitch Ratings said on Thursday, as the authorities demand that banks hold more cash in reserve to protect against future financial shocks.

The figure represents a 23 percent increase on what the banks currently hold in reserve and will most likely reduce return on equity, a critical figure used to gauge a firm's profitability, Fitch said.

The banks affected are the 29 "systemically important financial institutions" as designated by the global Financial Stability Board. They include the likes of Goldman Sachs, JPMorgan Chase, HSBC of Britain and the Mizuho Financial Group of Japan. In total, the firms hold roughly $47 trillion in combined assets.

Under new regulatory rules, known as Basel III, the firms must have a Tier 1 common equity ratio, a measure of a bank's ability to weather financial shocks, of roughly 9.5 percent by 2019, though officials are eager for banks to meet the targets as soon as possible.

To meet the deadline, Fitch says the 29 banks will probably hold onto future earnings and cut shareholder dividends, wind down exposure to risky investments like underperforming real estate portfolios, and tap investors for new cash.

As firms pull back from riskier sectors, the new regulatory regime may lead to increased borrowing costs, a tightening in the availability of credit and a shift of capital markets funding to less-regulated areas of the financial system, like from hedge funds and private equity firms, the ratings agency's report said.

Banks in the United States and Europe are already working to meet the new capital requirements, and have been selling noncore assets, paring back lending to the wider economy and reworking their balance sheets to find new sources of cash.

There is still a lot to get through. European banks, for example, still hold more than 2.5 trillion euros ($3.2 trillion) of noncore loans on their balance sheets, according to the accounting firm PricewaterhouseCoopers.

The push for banks to hold more money in reserve, instead of lending out the cash for a profit, will also affect profitability, according to the Fitch report. Once the Basel III rules are in place, the stricter capital requirements could reduce the median return on equity to 9 percent from current returns of approximately 11 percent. That represents a potential 20 percent reduction in profitability within the next decade.

Banks Must Raise $566 Billion in New Capital, Fitch Warns - Yahoo! Finance

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