It is believed that that banks will have to hold Tier 1 capital of 9 percent (currently in Basel II this is pitched at 4%), including a 3% "conservation buffer".
At least 5 percent of Tier 1 will be pure equity or retained earnings. If Tier 1 capital is less than 9%, banks will not be allowed to pay out dividends to shareholders.
In good times, banks have to allocate another 3%, the "anti-cyclical buffer". It simply means that in good times banks need Tier 1 capital of 12% in order to be able to pay dividends.
If one adds 4% Tier 2 capital, we reach an interesting number: 16% (6 percent Tier 1, plus 4 percent Tier 2, plus 3 percent conservation buffer, plus 3 percent anti-cyclical buffer).
Hedge funds are already shorting certain banks while investors try to understand how much capital banks may need to raise in order to be able to pay dividends.
The next step? Possibly the G20 summit in November, where the group’s leadersthey will give their seal of approval.