This is one of those graphics that walk a fine line between serving financially savvy subscribers and newcomers who may be unfamiliar with regulations on banks. It’s complicated but important, since we’re talking about banks whose failures could cause a financial crisis.
In essence, Basel III (it’s pronounced bay-zil, like the actor Basil Rathbone) is a global standard requiring banks to reserve a specified amount of common equity — cash or common stock — based on their sizes and assets, to cover themselves against future risk.
Banks would have to put aside more of their own equity to pay for losses caused by their own faulty decisions or unpredictable market fluctuations. The hope is that banks would think twice before entering into risky ventures, since more of their own money is at stake. The reserve would also reduce the necessity for government bailouts or other intervention.
This 2011 graphic shows the estimates of six major U.S. banks for their capital ratios, the ratio of capital to assets, or net worth to everything they own, including liabilities. All six estimate they will exceed the basic Basel III requirement of 7%.
However, the graphic notes the banks will also need to improve their capital ratios, from 1% to 2.5% according to Bloomberg analysis, for an additional charge levied on large banks with significant global connections. So that additional charge could prove difficult for the banks, notably JP Morgan and Citgroup.
That’s a lot of explanation for a relatively small graphic. I worked with Christopher Payne, a brilliant financial analyst whose story this chart accompanied, to whittle down the text and still retain pertinent facts. I would not say the graphic is perfect, but I think the cognoscenti and the newbies can find useful information here.