First, Banking 101. The more capital a bank is required to hold, the less it can lend. It will make smaller profits, compared to a bank that needs to hold less capital.
Next some definitions. DBS Group, United Overseas Bank (UOB), OCBC Bank are required to hold a minimum Tier 1 capital adequacy ratio (CAR) of 6% and a total CAR of 10%.
International rules will require banks to hold a minimum common equity Tier 1 (CET1) CAR of 4.5%. MAS has decided that locally incorporated banks meet this rule from Jan 1, 2013 – two years ahead of the international 2015 timeline.
MAS will raise the minimum CET1 CAR to 6.5% from Jan 1, 2015. It will also bring the minimum Tier 1 CAR to 8%. The total CAR will remain at 10%.
MAS will also introduce a capital conservation buffer of 2.5% above the CET1 CAR. This will be phased in from 2016 to 2019.
So by 2019 locally incorporated banks will have to maintain a CET1 CAR of at least 9%, Tier 1 CAR of 8%. and CAR at 10%.
But one OCBC estimates that its CET1 CAR would be around 10.8% cent based on the bank’s financial position as at March 31, 2o11. Its Tier 1 and total CAR are estimated at 14.1% and 16.9% respectively.
It’s only 2011 but OCBC’s CET1CAR is 20% above 2019’s required levels, while Tier 1 and total CAR are 76% and 69% more than required.
This is a lot higher than needed for a bank whose main markets (S’pore, Malaysia and Hong Kong) are safe, mature and well regulated markets. True OCBC is also into “cowboy” countries like China and Indonesia but these countries contribute little to revenue.
Too much capital relative to assets and liabilities is unfair to shareholders, while not benefiiting depositors and other creditors. It only makes life easy for regulators.
So OCBC should return excess capital in the form of dividends (I’m not in favour of buy-backs, something I’ll explain one of these days). Of course OCBC could decide to increase its balance sheet, but that usually leads to tears for shareholders.