Investors should pay careful attention to the location of an international bank’s head office as new global banking regulations requiring banks to increase their core capital percentage are introduced, according to Paul Vrouwes, manager of the ING investment banking and insurance fund. 

Head office location could affect banks' profitability under new global banking regulations, says ING.

The new rules under Basel III state that core capital needs to be 3.5 per cent on 1 January 2013 and 7 per cent on 1 January 2019.  If a bank substantially grows its loan portfolio, an additional buffer of 2.5 per cent can be required after that date.

Vrouwes points out that among others some Swiss banks will be put at a disadvantage when new national capital adequacy rules come into play.  For example, due to the relative size of the two major Swiss banks to the Swiss gross domestic product, the Swiss regulator wants UBS and Credit Suisse to have a buffer capital of 19 per cent by 1 January 2019.

“This will clearly increase pressure on the profitability on these banks in the future,” Vrouwes adds.

Spanish banks are disadvantaged by the fact that Spain – like the US – is dealing with a real estate crisis and banks are heavily involved in faltering mortgages.

Meanwhile, Germany is likely to keep the core capital requirement of its banks at 7 per cent.

Vrouwes believes that although there have always been differences between individual banks in the same country, these differences will increase significantly as a consequence of new capital requirements.