Global bank chiefs agree on tough new capital standards (Roundup)

Sep 12, 2010, 19:14 GMT

Basel/Berlin - Central banking chiefs and regulators from 27 of the world's leading economies agreed on tougher new rules for the running of banks Sunday, in a bid to make the industry more resistant to crises, the Basel Committee on Banking Supervision said.

In a statement released Sunday evening, the committee said that under the so-called Basel III standards, banks will be required to hold core tier one capital of 4.5 per cent, up from 2 per cent under previous agreements.

In addition, a further 'capital conservation buffer' would be required, bringing the total ratio of capital to assets that banks must hold to 7 per cent.

The core tier one ratio is a crucial measure for the health and shock resistance of a bank. Tier one capital is essentially the most secure form of capital that a bank can hold, meaning that it cannot be withdrawn by any other party.

'These capital reforms ... deliver on the core of the global financial reform agenda,' the committee statement said.

The new agreement comes almost two years exactly after the collapse of United States investment bank Lehman Brothers pushed the world into its deepest recession since the Great Depression of the 1930s. The aim of regulators has been to ensure that banks do not cause a similar crisis again.

The reforms are now to be considered by the leaders of the Group of 20 (G20) major economies at their November summit in Seoul.

Jean-Claude Trichet, president of the European Central Bank and chairman of the Group of Governors and Heads of Supervision, said that 'the agreements reached today are a fundamental strengthening of global capital standards. Their contribution to long-term financial stability and growth will be substantial.'

Resistance to tougher capital standards had come from French and German banks, which argue that the new rules would impose extra burdens on lenders when they are still recovering from the financial crisis.

However, the new regulations are to be phased in gradually between January 1, 2013 and 2015, with banks having until the later date to meet the full capital requirements.

The Basel Committee's guidelines are not binding, but previous agreements on capital standards have been widely adopted as a seal of approval recognised by financial institutions worldwide.