Salz Review - Wall Street Journal

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Salz Review
An Independent Review of Barclays’ Business Practices
Regulatory Capital
Barclays’ tier 1 regulatory capital ratio has varied over the last decade, from 8.2% in 2002,
to 7.6% in 2007 and 13.3% in 2012. A significant restructuring of the balance sheet
(increasing shareholders’ equity and reducing the total balance sheet size) led to a
significant increase in capital ratios in 2009.
There has been considerable debate concerning bank regulatory capital ratios, which are
recommended by the Bank for International Settlements or Basel Committee on Banking
Supervision and implemented by national regulators. In the European Union, these are
translated into Capital Requirements Directives.
Under the original Basel I Accord from 1988, banks were required to have a capital ratio
(percentage of capital to risk weighted assets) of 8%, of which core capital (tier 1) had to be
4%. Assets were weighted according to relatively simple rules, such as 20% for OECD
governments, 50% for residential mortgages and 100% for other assets. Tier 2 capital
comprised certain reserves, hybrid capital investments and subordinated debt.
Basel II then required the capital ratio to be no lower than 8%, divided into two tiers, and
required banks to have a minimum level of common equity (2%) and tier 1 capital (4%). It
came into force at various dates. Basel II attempted to adjust risk weighted assets based on
credit, market and operational risk. Banks could use, subject to regulatory consent,
advanced measurements based on their own models or standardised (non-modelled)
approaches. Basel II also mandated more disclosures.
Basel III, when fully implemented, will introduce a number of important changes to
strengthen the quality and quantity of capital, including more capital for counterparty risk
and derivatives, procyclicality and capital conservation buffers and other liquidity and
funding ratios. Originally, it required an increase by 2015 in common equity from 2% to
4.5% (plus a capital buffer of 2.5% to total 7%), and tier 1 capital increased from 4% to 6%
(plus other capital buffers). The minimum total capital ratio remained at 8% (plus capital
buffers). The EU is currently working on Capital Requirement Directive IV to implement
Basel III, plus changes to corporate governance and remuneration.