Basel Rules Aim to Head Off Global Banking Crises

Sunday, 12 Sep 2010 02:27 PM

 

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Global regulators, seeking to prevent any repeat of the international credit crisis, agreed on Sunday to force banks to more than triple the amount of top-quality capital which they must hold in reserve.

The "Basel III" reforms will require banks to hold high-quality capital, known as "core Tier 1 capital" and consisting of equity or retained earnings, equivalent to at least 4.5 percent of their risk-bearing assets. That is up from just 2 percent under current rules.

In addition, banks will have to build a new, separate "capital conservation buffer" consisting of common equity; the buffer will be worth 2.5 percent of assets. This will bring the total top-quality capital requirement to 7 percent.

Agreement was reached at a meeting of central bank governors and top supervisors from 27 countries chaired by European Central Bank President Jean-Claude Trichet.

"The agreements reached today are a fundamental strengthening of global capital standards," Trichet said in a statement. "Their contribution to long-term financial stability and growth will be substantial."

To ease the burden on banks, they will be given years to comply with the new requirements. The Tier 1 capital rule will take effect from January 2015, with the capital conservation buffer phased in between January 2016 and January 2019.

Nevertheless, the Basel III rules are the biggest change to global bank regulation in decades. Regulators hope they will push banks toward less risky business strategies and ensure they have enough reserves to withstand financial shocks without needing taxpayer bailouts.

In the wake of the global financial crisis, which was partly due to risky trading by banks, leaders of the Group of 20 leading countries called on regulators and central bankers in 2009 to work on tougher bank capital rules.

The G-20 leaders are set to endorse Sunday's deal when they meet in Seoul in November.

Most of the world's top banks, which have to a large degree recovered from the financial crisis, are not expected to rush to raise funds in response to the new capital requirements.

But there remain worries that banks in some countries face a long road to recovery, and that the Basel rules may cut the amount of money which banks can lend out to companies, slowing economic growth.

Sources told Reuters on Friday that Deutsche Bank, Germany's biggest bank, might raise up to 9 billion euros ($11.4 billion) to bolster its balance sheet.

© Copyright 2014 Bloomberg News. All rights reserved.

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