[ by Melanie Gretchen ] Fitch Ratings said the world's largest banks have to raise a combined $566 billion as new capital requirements demand that banks hold more cash in reserve to protect against future financial shocks.  The 29 banks, including Goldman Sachs, JPMorgan Chase, HSBC, and the Mizuho Financial Group of Japan, which in total hold some $47 trillion in combined assets, will have to increase by 23% what they currently hold in reserve.  The hike will most likely reduce return on equity, a critical figure used to gauge a firm’s profitability, the agency said. Basell III. Under new regulatory rules, the firms must have a Tier 1 common equity ratio, a measure of a bank’s ability to weather financial shocks, of roughly 9.5% by 2019.  Toward that end, the 29 "systemically important financial institutions" banks, as designated by the Global Financial Stability Board, will probably hold onto future earnings and cut shareholder dividends, wind down exposure to risky investments like underperforming real estate portfolios, and tap investors for new cash, Fitch said. Game Changer. With proprietary trading and other risky ventures off the table, the new regulatory regime may lead to:

• increased borrowing costs
• a tightening in the availability of credit
• a shift of capital markets funding to less-regulated areas of the financial system, such as hedge funds and private equity firms, the ratings agency’s report said.

To date, banks in the U.S. and Europe are already working to meet the new capital requirements.  They've been selling noncore assets, paring back lending to the wider economy, and reworking their balance sheets to find new sources of cash.  Across the pond, European banks have more than  €2.5 trillion ($3.2 trillion) of noncore loans on their balance sheets, according to the accounting firm PricewaterhouseCoopers. Profit Threat. Downsides of the new measure include affected profitability, the Fitch report said, as cash that would have been lent out sits there.  In addition, Basel III's stricter capital requirements could reduce the median return on equity to 9% from current returns of approximately 11% – representing a potential 20% reduction in profitability within the next decade. "Single digit return on equity reasonably could be the rule of the day," said Martin Hansen, senior director in Fitch’s macro credit research team.  "The recent high historical returns may be difficult to achieve." For further details, go to [Dealbook, 5/17/12].