Fitch: G-SIFIs Need to Raise $566B Ahead of Basel III

""Fitch Ratings"":http://www.fitchratings.com/web/en/dynamic/fitch-home.jsp recently published a report estimating that 29 global systemically important financial institutions (G-SIFIs) may need to raise about $566 billion in common equity in order to satisfy new Basel III capital rules by the end of 2018.

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The $566 billion figure reflects a 23 percent increase relative to the institutions' aggregate common equity of $2.5 trillion. Though the new Basil III rules will not be implemented until 2018, Fitch noted that the global banks will likely face market and supervisory pressure to meet those targets before then. The pressure to raise money may restrict the ability of G-SIFIs to increase dividends or undertake share buybacks.

Banks will probably use a mix of strategies to address capital shortfalls, including retention of future earnings and selling or winding down exposures subject to higher Basel risk-weights. Without additional equity issuance, the median G-SIFI should be able to meet this shortfall with three years of retained earnings.

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The stricter Basel III capital rules could imply an estimated reduction in large banks' median return on equity from about 11 percent over the past few years to approximately 8 percent to 9 percent, a reduction of almost 20 percent.

Basel III also creates incentives to reduce expenses and increase pricing on borrowers and customers for banks that continue to pursue returns on equity between 12 percent and 15 percent.

""Since it is impossible for regulators to perfectly align capital requirements with risk exposure, some banks might seek to increase ROE through riskier activities that maximize yield on a given unit of Basel III capital, including new forms of regulatory arbitrage,"" Martin Hansen, senior director with Fitch Macro Credit Research, said in a statement.

The report speculated that for riskier activities subject to higher capital charges, Basel III could increase borrowing costs, promote a shift to securitization and capital markets funding, or cause a migration to less regulated segments of the financial system, including shadow banks.

The 29 G-SIFIs collectively represent total assets of $47 trillion. The Fitch study looked at financial reporting as of the end of 2011 in order to provide a current view of where the G-SIFI banks stand in relation to Basel III requirements.

The report also looked at the G-SIFI entity as a whole and did not analyze the capital positions of any individual bank.