The ratio of a bank’s hard equity capital, which is immediately liable in the event of losses, to its risk positions, i.e., the loans granted. Although Basel II only required a minimum core capital ratio of four percent, values below six percent were considered questionable. – Under Basel III, at least 4.5 percent of risk-weighted assets must consist of hard core capital, i.e., open reserves and paid-in common equity or comparable forms of capital in the case of non-joint-stock companies; in addition, there must be 1.5 percent other tier one capital and a capital conservation buffer of 2.5 percent, which must also consist of hard core capital (core tier one, common equity). Under Basel III, the minimum amount of common equity that must be held increases to 4.5 + 2.5 = 7 percent, or by a factor of 3.5, while the overall minimum capital requirement rises from 4 percent to 8.5 percent. Including supplementary capital (tier two), the minimum capital ratio under Basel III will then be 10.5 percent. – The best way to avoid financial crises is to leave liability with the banks. Therefore, all national and international provisions to increase the capital ratio and establish corresponding buffers are to be welcomed. – As of June 2013, the twelve largest German banks had an average Tier 1 capital ratio of 15.3 percent. – See investment liability, Basel III, core capital, buffer, countercyclical, risk, risk cover, risk transformation, banking, forced convertible bond. – See Deutsche Bundesbank Annual Report 2010, p. 118 (core capital ratio of German institutions at year-end 2010), Deutsche Bundesbank Monthly Report of October 2010, p. 37 (core capital ratio of German institutions 2008 to 2010), BaFin Annual Report 2010, p. 125 (the Capital Adequacy Directive that came into force determines the eligibility of hybrid capital components as regulatory core capital as well), p. 148 f. (good results for the core capital ratio in the 2010 stress test), Financial Stability Report 2012, p. 38 f. (asset productivity of German institutions since 2002; overview), Deutsche Bundesbank Annual Report 2012, p. 104 (statistics).
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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
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