The Bank for International Settlements in Basel (Keystone Archive)
Banks will have to significantly increase their capital reserves under rules endorsed in Basel on Sunday by the world’s major central banks.
financial regulators welcomed the agreement, known as Basel III, saying banks would now be more resilient to shocks, although they added that the international community still needed to sort out the “too-big-to-fail” problem.
The new banking rules are designed to strengthen bank finances and rein in excessive risk-taking in order to prevent another financial collapse, but some banks have protested that they may dampen economic recovery by forcing them to reduce the lending that fuels growth.
Forcing banks to keep more capital on hand will restrict the number of loans they can make, but it will make them better able to withstand the blow if many of those loans go sour. The rules also are intended to boost confidence that the banking system won't repeat past mistakes.
Under current rules, banks must hold back at least four per cent of their balance sheet to cover their risks. This mandatory reserve – known as tier 1 capital – would rise to 4.5 per cent by 2013 under the new rules and reach six per cent in 2019.
In addition, banks would be required to keep an emergency reserve known as a "conservation buffer" of 2.5 per cent.
In total, the amount of rock-solid reserves each bank is expected to have by the end of the decade will be 8.5 per cent of its balance sheet.
“Solid foundation”
The agreement was “indispensable”, according to Daniel Zuberbühler, vice-president of the Swiss Financial and Market Supervisory Authority (Finma).
“This will enable [banks] to withstand larger shocks without relying on government support. As a result, the global financial system will be more resilient to shocks,” he said.
Philipp Hildebrand, president of the Swiss National Bank, agreed, but pointed out that while the reform package was “far-reaching”, it did not yet comprehensively address the TBTF ("too big to fail") problem.
“Further efforts will be required in that area at the international and at the national level,” he said.
“For Switzerland, the Basel III reform package provides a solid foundation on which to build a comprehensive national regulatory response to the TBTF problem.”
Credit Suisse said it had anticipated the reforms and described itself as “one of the most capitalised banks in the world”. It didn’t expect the new regulations to have any impact on its business.
UBS said in a statement it had taken note of the recommendations.
"For UBS the relevant standards are mainly set by the Swiss financial supervisory authority Finma. UBS will comply with the regulatory changes within the given time frame."
“Step forward”
Officials from the United States, including Federal Reserve chairman Ben Bernanke, issued a joint statement calling the new standards a “significant step forward in reducing the incidence and severity of future financial crises”.
European Central Bank (ECB) president Jean-Claude Trichet, chairman of the committee of central bankers and bank supervisors that worked on the new rules, called the agreement "a fundamental strengthening of global capital standards" that will encourage both growth and stability.
The deal still has to be presented to leaders of the G20 forum of rich and developing countries at a meeting in Seoul, South Korea, in November and ratified by national governments before it comes into force.
The agreement is seen as a cornerstone of the global financial reforms proposed by governments stung by the experience of having to bail out some ailing banks to avoid wider economic collapse.
Objections
Earlier this year, the Brussels-based European Banking Federation warned that the rules could keep the 16 nations that use the euro in or close to recession through 2014.
The federation, which represents more than 5,000 banks, said its analysis of proposed new Basel III banking standards shows that it would limit banks' credit growth and profits, hurt the economy and prevent the creation of up to five million jobs in the eurozone.
Another measure agreed on Sunday aimed at preventing banks from overstretching themselves was the introduction of a leverage ratio of three per cent.
Leverage, or borrowing to invest elsewhere, boosts returns but can backfire catastrophically if an investment declines. Some European banks had objected to this, arguing that the measure unfairly penalises small lenders with relatively safe credit portfolios.
Regulators also agreed to continue working on additional safeguards for "systemically important banks" – those that could bring down entire economies if they collapse.
by swissinfo.ch and agencies
