Basel III: ‘Dilute govt stake,help PSBs’

The banks would need a total equity capital of Rs 1.75 trillion,and non-equity capital of Rs 3.25 trillion,taking the overall requirement for Basel III to Rs 5 trillion,the governor told bankers at a Ficci-IBA organised summit here.

“The government has two options: either to maintain its shareholding at the current level or bring down its shareholding at 51 per cent in all the banks across the board,” Subbarao said.

“If the government wants to maintain its shareholding at the current level (by law it has to hold at least 51 per cent in each of its 26 banks),it will have to provide capital to the order of Rs 90,000 crore,(but) if it brings down its shareholding across all public sector banks,the burden reduces to just under Rs 70,000 crore,” he said.

However,Subbarao added,”But will the government sacrifice its majority shareholding responsibility,rights and obligations or will it amend the statutes such that even if their shareholding comes below 51 per cent,it continues to enjoy the privileges of a majority shareholder.”

The amount that the market will have to provide will be Rs 70,000 crore to Rs 1 trillion depending on how much the government will provide,he said,noting that the market has the capacity to offer this much funds as over the past five years banks have raised equity capital worth Rs 52,000 crore.

The RBI Governor also discouraged the government from issuing recapitalisation bonds to the banks,saying that such a move militates against fiscal transparency and it only postpones the issues to a later period.

“Providing equity of this size will be quite a significant challenge given fiscal constraints of the government. The tempting option would,of course,be to issue recapitalisation bonds but as we all know it militates against fiscal transparency,” Subbarao said.

The average return on equity for the domestic banking system for the last three years has been around 15 per cent.

Noting that the implementation of Basel III norms is expected to result in a decline in the RoE in the short-term,he however said,”the expected benefits arising out of a more stable and stronger banking system will largely offset the negative impact of a lower RoE in the long-term.”

Basel panel may list some large domestic banks as D-SIBs: Guv

RBI Governor D Subbarao today said they are awaiting final report of the Basel Committee on global systematically important banks (GSIBs) and expressed hope that the report may list some large domestic banks as domestically systematically important banks (D-SIBs).

“There are no local banks in the list of the GSIBs as of now. However,the Basel Committee is working on the minimum principles for domestically systemically important banks (D-SIBs)…we are waiting for the finalisation of these norms and when these norms come up,some domestic institutions might be designated as D-SIBs,” Subbarao told a banking summit organised by FICCI and IBA here today.

The Governor said there is a need to have sound mechanisms for DSIBs and he hopes that the Basel Committee on GSIBs will prescribe higher solvency standards DSIBs.

The Financial Stability Board (FSB) had last October published its consultative document on a common template for GSIBs,which seeks to include a set of options and proposals to improve the data on linkages between GSIBs and on their exposures and funding dependencies.

The FSB’s attempt at improving the solvency of large bank got added importance following the 2008 credit crisis which saw many of the world’s mightiest banks going belly up or getting bailed out by governments across the Western world.

Following this crisis,decisive steps have been taken at the international level to advance the programme of financial reforms,including major improvements in regulation and supervision.

The FSB is framing rule to reduce the moral hazard posed by systemically important financial institutions and put in place effective resolution of systemically important financial institutions.