The world's largest financial institutions may need to raise more than $500 billion to meet new global capital standards on the horizon, according to a report from Fitch Ratings that warned of the impact the rules could have on the ability of institutions to increase dividends or repurchase shares.
Under the so-called Basel III accords currently being debated for final agreement, financial institutions will be required to increase the amount of capital they hold in reserve and take other steps to become less vulnerable to financial crises.
Fitch believes global banks will have to raise roughly $566 billion in common equity to satisfy the new rules, representing a 23% increase relative to their aggregate common equity of $2.5 trillion. Full implementation of the rules isn't slated until 2018, however, the firm believes global banks will face both market and supervisory pressures to meet capital targets earlier.
It added it expects banks to pursue a mix of strategies to address capital shortfalls, in particular by retaining future earnings in an effort to boost capital cushions.
Once fully implemented, the stricter capital rules could result in an estimated reduction of more than 20% in large banks' median return on equity, from about 11% over the past few years to approximately 8% to 9%. With that shift, however, new issues could arise for regulators, according to Fitch Senior Director Martin Hansen.
"Since it is impossible for regulators to perfectly align capital requirements with risk exposure, some banks might seek to increase ROE through riskier activities that maximize yield on a given unit of Basel III capital, including new forms of regulatory arbitrage," Hansen said.
All of the signatories to Basel are supposed to have enacted it in national law by the end of this year. The U.S., which never fully put in place the previous Basel accords, still hasn't published its draft law.