Capital 101 - Stop Basel Endgame

How Capital

Works

When capital requirements are set excessively high, it makes it much harder to secure a loan or credit—this is especially true for working families and small businesses.

Let’s Start by defining capital

Capital is the amount by which a company’s assets exceed its liabilities. For example, suppose a baker invests $600,000 into building a bakery financed with both $100,000 of their own money and a bank loan for $500,000. The bakery’s assets are worth $600,000, while its liabilities equal $500,000, leaving $100,000 in capital – the amount the baker invested.

For banks, capital is the difference between the assets of the bank (loans and securities) and the liabilities of the bank (deposits and other borrowings).

Higher Capital Affects Lending.

Too much capital has

consequences.

Having a strong capital base is important because capital absorbs losses to the bank (for example, when someone doesn’t pay back a loan).

While having a large amount of capital makes a bank safer, funding bank loans and other activities with capital (money raised by selling equity shares or retaining income) is more expensive than funding it with debt (money raised through borrowings including deposits).

As a result, the more a bank funds itself with capital, the more it must charge for loans. In other words, the supply of bank credit for businesses and households falls.

How does the basel

endgame approach

differ from other

countries’ capital

standards?

One of the original goals for the Basel proposal was to make international standards consistent, but the U.S. is implementing standards that vary widely from its global peers. Other countries understand the effect of higher capital requirements will have on people and the economy, and they are implementing requirements that are more thoughtful and tailored than what the U.S. has proposed.

Component	Basel
Credit Risk	IG counterparties eligible for lower risk weight Counterparties must have publicly listed securities to receive lower RW	Public listing not required	Public listing not required	Public listing not required	Public listing requirement waived if annual sales > CAD 75mm	Public listing required
SFTs	Implement minimum haircut floor Minimum haircut floor not applicable to banks "in jurisdictions that are prohibited from conducting such transactions below the minimum haircut floors"	Not Implemented	Not Implemented	Not Implemented	Not Implemented	Implements minimum haircut floors
Derivatives	Introduces SA-CCR Gross-up all SA-CCR exposure by 40%	No gross-up in the output floor	No gross-up for non-financials and personal funds	Gross-up all SA-CCR exposure by 40%	Gross-up all SA-CCR exposure by 40%	N/A for US due to elimination of bank models for credit risk
CVA	Introduces revised CVA methodologies with less granular risk weights and no exemptions	End-user exemptions for CVA	More granular risk weights for financials	No exemptions	No exemptions	No exemptions
Op Risk	Firms must calculate a standardized operational risk requirement comprised of a business indicator and loss component (including ILM)	ILM set to 1	ILM set to 1	ILM set to 1 only if business indicator is < JPY 100bn	No changes	ILM > 1 based on historical losses (and floored at 1)

Congress must stand up to the banking agencies

AND stop Basel Endgame

before it's too late.

contact now

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