This emerges from the Basel Committee on Banking Supervision's most recent monitoring exercise into the progress that banks are making towards Basel III. Profit retention, cost savings, balance sheet adjustments and issuing new capital instruments are obvious measures to ensure compliance with the framework requirements.
Until 31 December 2013 the Dutch banks fell under the Basel II regime. On 1 January 2014 the Basel III regime came into effect in the Netherlands, involving more stringent capital and liquidity requirements for the banks. These requirements are not implemented all at once, however. Starting in 2014, the requirements will be gradually tightened until the Basel III migration process is completed in 2022.
For example, some existing financing instruments will gradually be excluded from capital buffers. This means that the banks have a number of years to effectuate a gradual and prudent transition to the new and stricter regime. In order to achieve this, they will raise their levels of capital by issuing new capital instruments, retaining profit and making balance sheet adjustments.
Improved capital positions
On 31 December 2013 the Total Capital Ratio of the Dutch banks under the Basel II regime came to 18.6% on average. Under the tighter definitions of the fully implemented Basel III regime, this percentage would have fallen to 14.1%, however. The CET1 capital ratio (Common Equity Tier 1 or CET1, a measure of the levels of highest quality capital) on that date under the Basel II regime was 13.8%. Again, the Basel III definitions would have yielded a lower percentage of 11.8%.
Finally, the new Basel III leverage ratio (according to the most stringent definition) would be 3.8% on average as at the end of December 2013. Although not all individual banks achieved percentages sufficient to meet the future requirements, it is important to note that capital ratios have slowly but steadily risen over the last three years. Figure 1 presents an overview of the capital ratios under the Basel II and the Basel III regimes.Figure 1 - Average weighted capital ratios of Dutch banks at various measuring moments