Basel III - Tier I and Core Capital

For those of you who have recently been reading the consultive document, published by BIS for analysis, probably have stumbled upon the new rules concerning the inclusion of capital in the Tier I and Core Capital Ratios:

1 - The quality of capital that will be eligible for the Tier I ratio should increase significantly. Hybrid securities that were once eligible for this ratio and widely issued by most banks will transit out from Tier I to Tier II capital.

2 - A new capital ratio is to be introduced, the Core Capital Ratio, adding to the two existing ones: Tier I and Total Capital ratios. Although no specific minimum has yet been proposed for this ratio (unlike the existing minimum of 8% for the Tier I ratio which will probably remain at the same level in the new proposal) specific criteria has been put forward on the type of capital that is eligible. Core Capital shall be composed primarily of Equity like capital, with no fixed coupon, no maturity and absolute subordination to all other capital. In other words this should be that type of capital that takes the first hit in an event of insolvency.

3 - Most of the deductions that were priorly made to the Tier I capital will now be made directly from the Core Capital.

4 - Additional deductions are to be made to Core Capital (most of which have stirred controversy among the principles of the banking industry) namely the exclusion of Minority Interest, exclusion of Deferred Tax Assets, all type of Goodwill and full and immediate deduction of unfunded fixed benefit pension fund liabilities.

Other general thoughts:

Mutual banks on average have weathered the crisis quite better than for-profit commercial and investments banks mostly due to being more conservative (apparently there is some benefit to moving slowly) and concentrating on their core lending businesses, while others have been chasing short-term objectives.

An interesting fact about the mutuals is that apparently they might be better prepared for rasining capital. With a large member base, banks such as Rabobank, Raiffeisen and a few traditional French and Italian mutuals might be able to raise eligible capital for their Core Capital base directly from their customers. Actually this is being done already. Rabobank in particular has about 20% of its Tier I capital in the form of member certificates. Maybe standard commercial banks can learn on their experience and become more "mutual oriented themselves".