GLOBAL BANKING regulators in Switzerland have reached a deal that will force the world’s banks to bolster their capital reserves, in one of the most important reforms to emerge from the financial crisis.
The long-awaited agreement hammered out yesterday by central bankers and officials from the 27 member countries of the Basel Committee on Banking Supervision follows months of debate on how to make banks more resilient to financial shocks.
Weaknesses in the previous Basel II rules have been blamed for the financial crisis. But bankers have warned that if the new standards are too harsh or the implementation deadlines are too short, then lending will be curtailed, cutting economic growth and costing jobs.
The reform package, known as Basel III, includes a new minimum core tier one ratio for banks worldwide. This vital measure of bank safety compares a bank’s equity plus retained earnings with assets, adjusted by their riskiness. The current minimum is 2 per cent.
The Basel group, which announced details of the deal late yesterday, has set the new minimum at 4½ per cent and added, for the first time, an additional buffer of 2½ per cent, making the total 7 per cent. Banks within the buffer zone will face restrictions on their ability to pay dividends and discretionary bonuses.
Although a solid group of countries agreed on the 7 per cent figure at a preliminary meeting earlier in the week, some countries had wanted minimums as low as 4 per cent and others as high as 10 per cent.
The Basel group also announced that the new rules should be gradually implemented from 2013 to the end of 2018.
The reform package not only requires more capital but also tightens the definition of what counts toward core tier one capital.
Ahead of the decisions, banking analysts had said that if the preliminary 7 per cent proposal were approved, most large US and European banks would be able to avoid substantial new equity raising. “For the big internationally active banks, I don’t think it is going to be much of a challenge to meet the new standards,” said Gerhard Schroek, partner at the Oliver Wyman consultancy.
However, it emerged yesterday that the European Banking Federation, a lobby group, wrote to European Central Bank president, Jean-Claude Trichet, this week repeating a warning that tighter rules may limit the amount banks lend to individuals and companies.
The committee has yet to agree on revised calculations of risk-weighted assets, which form the denominator of the capital ratios to be determined this weekend. The implementation details of a short-term liquidity ratio will also be decided by the time G-20 leaders meet, members say. A separate long-term liquidity rule will likely be left to next year.
The two liquidity rules would require banks to hold enough cash and easily cashable assets to meet short-term and long-term liabilities. The long-term requirement has been criticized the most by the banking industry, which claims it would force banks to sell $4 trillion (€3.15 trillion) of new debt.
The Basel committee has another meeting scheduled for September 21st-22nd.
Meanwhile, the Financial Timespublishes an editorial today saying that the Government should not extend the guarantee to new debt issued by Irish banks.
The British newspaper says that doing so forces taxpayers “chained to a sinking ship to build lifeboats for exiting creditors”. – (Copyright The Financial Times Limited 2010 and Bloomberg)
