The Basel Committee on Banking Supervision says that capital requirements for the biggest banks will decline under the new Basel II framework.

The fifth Quantitative Impact Study for the G10 countries show that minimum required capital under Pillar 1 of the Basel II Framework would decrease relative to the current Accord. For Group 1 banks (internationally active and diversified institutions with Tier 1 capital of more than 3 billion euros), minimum required capital would decrease on average by 6.8%, based on the results for the approach to credit and operational risk that participating banks are likely to adopt after implementation.

“The committee expects that in the course of implementing the Basel II Framework, supervisors will ensure that banks maintain a solid capital base throughout the economic cycle,” noted Jaime Caruana, chairman of the Basel Committee and Governor of the Bank of Spain. “Mechanisms are in place to achieve this goal.”

Of the two internal ratings-based approaches, the advanced approach shows a greater reduction (–7.1%) in minimum required capital than the foundation approach (–1.3%). Minimum required capital under the standardised approach would increase by 1.7% for Group 1 banks. However, very few G10 Group 1 banks are expected to adopt this approach.

Group 2 banks show a greater reduction in minimum required capital under all approaches, largely due to their higher proportion of retail exposures, the BIS said.

The results for banks in non-G10 countries that participated in the study show substantial dispersion both within and between countries, mostly due to the specialised business profile of certain banks and particularities in national implementation. To the extent that banks’ risk profiles are similar, their QIS results appear to be broadly in line with the results for the banks in G10 countries.

The committee agreed that no adjustment of the scaling factor of 1.06 for credit risk-weighted assets under the internal ratings-based approaches would be warranted at this stage. “Sound validation procedures are key to ensure that implementation of the Basel II Framework properly reflects banks’ underlying risk. In the course of implementation, while banks are becoming familiar with the greater risk sensitivity of the Basel II Framework, they should exercise caution in the way that minimum required capital influences their decisions on actual capital levels,” it said.