New global banking regulations unveiled
(13 September 2010 – Global) 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 percent.
The Basel group, which announced details of the deal late yesterday, has set the new minimum at 4.5 percent and added, for the first time, an additional buffer of 2.5 percent, making the total 7 percent.
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 percent figure at a preliminary meeting earlier in the week, some countries had wanted minimums as low as 4 percent and others as high as 10 percent.
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 percent proposal were approved, most large US and European banks would be able to avoid substantial new equity raising.
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 percent.
The Basel group, which announced details of the deal late yesterday, has set the new minimum at 4.5 percent and added, for the first time, an additional buffer of 2.5 percent, making the total 7 percent.
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 percent figure at a preliminary meeting earlier in the week, some countries had wanted minimums as low as 4 percent and others as high as 10 percent.
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 percent proposal were approved, most large US and European banks would be able to avoid substantial new equity raising.
Subscribe