Plans to make banks hold greater capital reserves and limit the amount they can borrow have been outlined by the world’s leading banking watchdog in an effort to prevent a repeat of the credit crisis.
The proposals from the standard-setting Basel Committee on Banking Supervision are an attempt to salvage a global regulatory framework for the industry.
The move comes after a string of state-backed rescues in the US and Europe as governments have injected capital into their banks in an bid to shore up confidence in the financial system.
The crisis has triggered calls from some policymakers to scrap the Basel II framework for global bank regulation, which is seen as having contributed to the crisis by allowing banks to operate with relatively low capital reserves.
However, some regulators believe that the Basel framework, which took nine years to put in place, can be salvaged.
The Basel Committee yesterday signalled that over the long term it would encourage banks to make provisions for bad debts throughout the economic cycle. This would boost banks’ capital reserves while also providing a brake on growth in new lending.
The watchdog also signalled it might introduce rules to limit the absolute amount of debt a bank can take on relative to its capital base.
This measure, known as a leverage ratio, had been fiercely resisted by European banks but was recently introduced by the Swiss regulator following the meltdown at UBS.
Nout Wellink, president of the Dutch central bank and chairman of the Basel Committee, has defended Basel II, arguing that the framework had only come into force in many countries at the beginning of 2008.
However, he acknowledged that the crisis had created the need for fundamental reform. “Ultimately, our goal is to help ensure that the banking sector serves its traditional role as a shock absorber to the financial system, rather than an amplifier of risk between the financial sector and the real economy,” he said in a recent speech.
Basel officials believe the new rules, details of which will be drawn up over the next year, would provide a basis for reestablishing privately owned financial institutions. However, they stressed that the Basel Committee had no intention of forcing through new measures until the crisis has eased.
“We’re not going to jack up all the minimum capital requirements in the middle of a crisis,” one said.