24th May 2019

Fresh capital rules will require banks to hold billions more in reserve

  • Banks will have to raise billions of euros in quality assets, but over about a decade (Photo: duncan)

Banks will have to retain billions of euros more in capital to avoid government bail-outs or even collapses in the future after central bankers and regulators meeting in Switzerland agreed some of the biggest adjustments in global banking regulation in years over the weekend.

On Sunday night, the oversight body within the Basel Committee on Banking supervision, the organ widely considered to be the key institution co-ordinating financial supervisory rules and standards, made up of the heads of central banks and national supervisors from 27 major economies, backed the new so-called Basel III rules, pushed for in the wake of the economic crisis.

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The committee backed a compromise position that would require banks to increase the percentage of 'core tier one capital', essentially a bank's safest assets made up of equity and retained earnings, from the current requirement of 2.5 percent of overall capital to 3.5 percent by 2013, then subsequently to 4.5 percent by 2015.

Adding another layer of security, banks will also have to create a capital conservation buffer of an additional 2.5 percent by 2019, bringing the total amount of capital equity requirements to seven percent.

The previous Basel II requirement demanded capital holdings that were insufficient to absorb bad loans on their books when the credit crunch struck three years ago.

A number of countries, in particular the UK and US, had pushed for higher capital requirements and a more rapid implementation period, but they faced substantial opposition from Germany, whose regional public banks are in a parlous state.

Ahead of the meeting, London and Washington were arguing for the rules to be in place by 2018 while Berlin was pushing for a 2023 deadline.

Critics fear that the rules will force banks to raise billions in fresh capital to cover the new rules while lending, particularly to small businesses remains weak.

With Europe's faltering growth, there is also the concern that banks will be unable to muster sufficient profits to deal with the existing toxic loans even without the additional pressure of tougher capital requirements.

The president of the European Central Bank, Jean-Claude Trichet, cheered the result, calling it a "fundamental strengthening of global capital standards."

But the banking lobby was less impressed and worried about the length of the transition period.

The European Banking Federation wrote a letter to Mr Trichet, warning that its members are "very concerned about the effect that [Basel III] may have on banks' lending."

"The transition, though, is the critical bit, as the rules suck money out of the economy," said Angela Knight, head of the British Bankers' Association.

"Even though the UK banks are in a much stronger place than most on capital, the Basel changes need to be implemented over a long timetable and very carefully sequenced to avoid prolonging the downturn," she said.

Supporters meanwhile fear that the new Basel III rules will not be put into any international treaty, and will depend on the willingness of governments to impose them as law.

A report on the subject to be voted on by the European Parliament's economics committee has already received a slew of amendments looking to water down the rules, introduce exceptions and lengthen the implementation schedule.

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