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Global banking regulators from 27 countries, including the ECB’s Jean-Claude Trichet and the US Federal Reserve’s Ben Bernanke gathered today in Basel and adopted a regulatory reform package that will effectively raise the total common equity requirements of banks to 7pc.
The Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, at the Bank for International Settlements in Switzerland have set minimum requirements for the amount of top quality capital banks must hold against future losses at an effective 7pc, in a move which is hoped will avoid such financial crises as that seen in recent years in the future. Banks have until 2018 to fully implement the new rules set out today.
Some countries like the UK, whose big banks are already well-capitalised were pushing for an even higher ratio, while Germany, whose banks are widely seen as needing a further injection of capital, had resisted such an agreement when proposed in July, but all backed the plan today.
The new reform package, know as Basel III will see the core tier one capital (essentially equity plus retained profits) ratio increase from a current minimum of 2pc to 4.5pc, as well as an additional 'buffer' of 2.5pc "to withstand future periods of stress". Those banks within the so-called buffer zone would see restrictions placed on them as regards their freedom to pay discretionary bonuses and dividends to shareholders. Banks will have until the end of 2018 to implement the new rules fully.
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. The transition arrangements will enable banks to meet the new standards while supporting the economic recovery."
“The combination of a much stronger definition of capital, higher minimum requirements and the introduction of new capital buffers will ensure that banks are better able to withstand periods of economic and financial stress, therefore supporting economic growth," added Nout Wellink, Chairman of the Basel Committee on Banking Supervision and President of the Netherlands Bank.
Pictured: Bank for International Settlements, Basel