Peer pressure, along with regulatory changes, will push global banks to maintain strong capitalization, says a new report from Fitch Ratings.
Last week, the Financial Stability Board (FSB) released its updated list of banks that are considered globally systemically important. Three banks were dropped from the list, and two were added. Fitch said it expects the three banks leaving the list to maintain good levels of capitalization, which it says “will be important if they are to improve their credit ratings and maintain access to the funding markets without depending on extraordinary state support.”
But, regardless of whether banks are on the systemically important list or not, the rating agency says that it expects global banks to target capitalization in line with their peers. “A bank may be downgraded below peers if it is unable to bolster and maintain capitalization in line with its peer group,” it says.
Global systemically important banks are required to hold additional capital buffers ranging from between 1% and 3.5% above the 7% Basel III minimum, although none of them are required to hold the 3.5%. However, Fitch observes that the large global banks are now targeting Common Equity Tier 1 ratios of at least 10%, which it says sets a benchmark for others.
“Banks around the world… continue to improve their capitalization. Together with Basel III, market and peer pressure, the capital surcharges will ensure that safe capital buffers are built and maintained. However, we expect returns on equity to run at a lower level for banks than they have historically as a result of the heightened capital buffers,” it says.