Global banking regulators on Sunday sealed a deal to effectively triple the size of the capital reserves that the world’s banks must hold against losses, in one of the most important reforms to emerge from the financial crisis.

The package, known as Basel III, sets a new key capital ratio of 4.5 per cent, more than double the current 2 per cent level, plus a new buffer of a further 2.5 per cent. Banks whose capital falls within the buffer zone will face restrictions on paying dividends and discretionary bonuses, so the rule sets an effective floor of 7 per cent.

A majority of countries, including the US and UK, wanted tougher standards than those that finally emerged, but they agreed to a lower total ratio and an extended implementation period after resistance from Germany, among others. The new rules will be phased in from January 2013 through to January 2019.

The long-awaited agreement, hammered out at the weekend by central bankers and officials, follows months of wrangling among the 27 member countries of the Basel Committee on Banking Supervision over how to make banks more resilient to financial shocks.

Jean-Claude Trichet, president of the European Central Bank and chairman of the negotiating group, called the deal “a fundamental strengthening of global capital standards … Their contribution to long term financial stability and growth will be substantial.”

Tougher capital standards are considered critical for preventing another financial crisis, but bankers had warned that if the new standards were too harsh or the implementation deadlines too short, lending could be curtailed, cutting economic growth and costing jobs.

In addition to the 4.5 per cent so-called core tier one ratio, and the 2.5 per cent buffer, the reform package also endorses the idea of an additional buffer of up to 2.5 per cent of core tier one capital to counter the economic cycle, although the details on this remain sketchy.

Analysts say that most large US and European banks can meet the 7 per cent standards without substantial new equity raising. But some public sector German banks could struggle. The Basel group also warned that it was still working on setting additional requirements for the largest global banks deemed systemically important.

German Bundesbank President Axel Weber on Sunday said he welcomed the new capital rules.

“I am glad that it’s been possible today to come to a consistent and challenging international framework for new minimum bank capital requirements,” he said in an emailed statement. “The gradual transition phase will allow all banks to meet the higher minimum capital and liquidity requirements. Also, the special nature of German financial institutions was properly taken into account.”

EU internal market commissioner Michael Barnier also welcomed the deal, describing it as “ambitious” but one which “struck the right balance”. In particular, he said the transition period was “right” and sufficiently long to prevent economic growth from being endangered.

He said the commission would bring forward leigislation in the first quarter of 2011 to implement the new rules in Europe. This will be done by another round of revisions to the capital requirements directive.

Additional reporting by Nikki Tait

Get alerts on Banks when a new story is published

Copyright The Financial Times Limited 2019. All rights reserved.
Reuse this content (opens in new window)

Comments have not been enabled for this article.

Follow the topics in this article