LatAm sits pretty as Basel III advances with leverage, liquidity rules

LatAm sits pretty as Basel III advances with leverage, liquidity rules

Bonds Corporate & Sovereign Strategy

Latin American banks are likely to comfortably comply with further details of the Basel III framework that were mandated by the Bank for International Settlements (BIS) on Sunday.

Under the maximum leverage ratio for banks stipulated by the BIS, banks in Argentina, Brazil and Mexico — Latin America’s Basel-adherent countries — will have to hold capital equal to at least 3% of their assets from January 2018.

The new metric, the leverage ratio, measures tier one capital as a proportion of total assets. It is a second regulatory capital metric, adding to the rule that came into force in 2013 which measures bank capital as a proportion of risk-weighted assets.

The incoming rule is unlikely to cause difficulties for Latin banks, says Franklin Santarelli, managing director at Fitch Ratings. “All banks in Argentina, Brazil and Mexico have leverage ratios way above 3%,” he tells LatinFinance. “It’s rare to find a bank with less than 5%.”

BIS also further specified details on the short term funding requirements, known as the liquidity coverage ratio. The rule calls for banks to hold enough liquid assets equal to cover a 30-day funding freeze. Under details released this week, BIS gave regulators guidance on defining liquid assets. Those are anyway typically more clear-cut in Latin America than other parts of the world, where it was hotly debated whether covered bonds, for example, could qualify.

“Most banks’ investment portfolios are 90% government securities, and the rest of their balance sheet tends to be in loans,” says Santarelli.

Latin American banks have been less affected by tighter funding and solvency regulations that their global peers, although they have already taken measures to comply with the new rules.

In September last year, Banco do Brasil amended the terms of its $3.75bn worth of tier one hybrid securities sold in 2012 and 2013, to make them comply with Basel III rules. And in December, Santander Mexico sold Latin America’s first Basel-III compliant tier two bond.

The global rule-setter also presented a consultation document on the net stable funding ratio, a measure of term funding in proportion to a bank’s assets, on Sunday. LF

Full details of the new Basel III rules can be found on the Bank for International Settlements website