Central bank chiefs agree on measures to control top banks
Central bank governors agreed Saturday on ways to help reduce the "moral hazard" of leading banks whose failure would bring chaos to world finance.
The measures relating to so-called global systematically important banks were designed to strengthen their resilience and included raising their loss absorbency requirements.
The idea was also to "create strong incentives for them to reduce their systemic importance over time," a statement issued by the Bank for International Settlements (BIS) said.
The measures were formulated by the Group of Governors and Heads of Supervision (GHOS), the oversight body of the Basel Committee on Banking Supervision (BCBS), the statement said.
"The additional loss absorbency requirements are to be met with a progressive Common Equity Tier 1 (CET1) capital requirement ranging from 1% to 2.5%, depending on a bank's systemic importance," the statement said.
"To provide a disincentive for banks facing the highest charge to increase materially their global systemic importance in the future, an additional 1% surcharge would be applied in such circumstances."
"The GHOS is submitting this consultative document to the Financial Stability Board (FSB), which is coordinating the overall set of measures to reduce the moral hazard posed by global systemically important financial institutions.
"This package of measures will be issued for consultation around the end of July 2011."
The proposed yardsticks "include the methodology for assessing systemic importance, the additional required capital and the arrangements by which they will be phased in," the statement said.
The assessment methodology was based on five broad categories of indicators: "size, interconnectedness, lack of substitutability, global (cross-jurisdictional) activity and complexity," the statement said.
In the statement, European Central Bank chief Jean-Claude Trichet -- who is also GHOS chairman -- said the agreements would "help address the negative externalities and moral hazard posed by global systemically important banks."
BCBS chairman Nout Wellink, the head of the Dutch central bank, added: "This will contribute to enhancing the resiliency of the banking system and help mitigate the wider spill-over risks of global systemically important banks."
The proposed new rules will run in parallel with the Basel III international regulations aimed at shoring up banks against future crises.
They are to be introduced progressively over three years from January 1, 2016.
The financial crisis triggered by the collapse of US bank Lehman Brothers in 2008 forced many major economies to rescue their commercial banks to prevent the biggest ones from failing and bringing down whole economies.
Regulators moved to toughen up capital requirements with the Basel III rules, although some banks have protested that they would be costly and harm the economy.
Basel III requires banks are to raise their high-quality core common equity to 7.0 percent of assets from the current 2.0 percent, but some countries including Switzerland have imposed much stricter controls.
Britain this month announced a major overhaul of its banks, approving a separation of their retail and investment businesses.
The practice of banks using money from their retail arms to fund investment operations has been widely blamed as a major factor behind the global banking crisis.
© 2011 AFP