# Are remaining G-SIB shortfalls of Basel III capital more problematic than it seems?

At an eight month lag to the base reported data it is based on, BCBS's half yearly Basel III monitoring report was published recently looking at banks' progress towards meeting Basel III capital and liquidity rules. On the surface the report seems to have a pretty positive message. Reading between the lines and combining with other information there is a more interesting story behind the numbers on what it will take to meet the minimum ratios.

At an eight month lag to the base reported data it is based on, BCBS's half yearly Basel III monitoring report was published recently looking at banks' progress towards meeting Basel III capital and liquidity rules. On the surface the report seems to have a pretty positive message. Banks are becoming safer through more capital and liquidity reserves. Without saying so out loud, the graphs and statistics seem to imply the shortfalls are under control. Reading between the lines and combining with other information there is a more interesting story behind the numbers on what it will take to meet the minimum ratios.

**Capital and Leverage Ratios – mixed news**

**When does this bite?**Disclosure now

**How are the G-SIBs doing?**Significant remaining total capital shortfall obscured by historic reductions

**How many G-SIBs have shortfalls?**Maybe a minority of the 30 with significant shortfalls each

- Of 98 Group 1 banks (which include the 30 G-SIBs) 11 didn't meet one or both of the 3% minimum leverage ratio and the target total capital ratio of 8.5% (i.e. fell out side the top-right quadrant formed by the
*dotted lines*in the graph)

- There are some higher G-SIB specific standards for which I added two
*red lines*. The horizontal red line represents: a total capital ratio minimum of 11.5% including the 2.5% capital conservation buffer and the minimum 1% G-SIB surcharge. The vertical red line represents: the US G-SIBs have to maintain a leverage ratio minimum of 5% instead of 3%. (An implication for example is that we have to hope that the US G-SIBs were or become red dots in the top right quadrant formed by thes*red lines*)

**What can the shortfall G-SIBs do about it?**1. Drastic measures

**What can the shortfall G-SIBs do about it?**2. Optimize

- Lobbying to change leverage ratio rules – for OTC derivatives (especially FCM cleared) and futures
- Compression expansion (line-item compression ramped up in 2014, risk compression may follow) – cleared OTC derivatives today, bilateral in future?
- CCP expansion (the coming EU OTC clearing mandate, CCP portfolio margining, elective OTC legacy backloading, expanding repo CCP participation to the buy side, expanding CCP product eligibility)
- Bilateral innovation (the coming IM mandate, bank portfolio margining, selective unwinding of portfolios, elective IA/IM to mitigate RWA)