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Banks unite in concerns over capital requirements directive

Wednesday 12 May 2010 - by Luke Nelson

The capital requirement proposals published by the Basel Committee on Banking Supervision in December have resulted in a global response from banks. Luke Nelson analyses both the shared and divergent opinions in the responses

Banks are generally receptive to the overall efforts being taken to strengthen the capital requirements framework but many do express dissatisfaction with specific elements of the Basel proposals.

While some banks have mentioned jurisdiction-specific concerns over plans set out in ‘Strengthening the resilience of the banking sector’ and ‘International framework for liquidity risk measurement, standards and monitoring’, there are a number of points over which banks from around the world are united in their concern.

Deferred tax assets

One recurring theme in the responses to Basel is the dissatisfaction with the proposal that deferred tax assets - which rely on future profitability of the bank to be realised - should be deducted from the common equity component of Tier 1.

The American Bankers Association argues that experience shows DTAs are realisable assets that should be included in Tier 1 capital. Barclays suggests that while it may be appropriate to make a capital adjustment in respect to DTAs for prudential purposes, the calibration of this adjustment must be right in order to ensure a level playing field for all regulated banks. The current proposal, it argues, does not achieve this.


BNY Mellon suggests the use of the US approach of limiting the recognition of DTAs within Tier 1 capital to those that can be realised within a year. Standard Chartered suggests that DTAs should be recognised in accordance with prevailing accounting rules but should be subject to a regulatory assessment of recoverability.

It is not just Anglo-American banks that report dissatisfaction with the treatment of DTAs. The China Banking Regulation Commission argues that the Basel Committee on Banking Supervision should grant national supervisors a certain degree of discretion when dealing with DTAs, such is the complexity in their formation.

Santander, meanwhile, advocates a three-layer approach to DTAs which suggests that DTAs not associated with losses reported in previous year, a realisation period less than 10 years, or related to expected losses provisions, should not be deducted. Deutsche Bank goes as far as to argue that full DTA deduction would actually increase procyclicality in the financial sector.


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