Central bankers meet to finalise bank rules reform

12th September 2010, Comments 0 comments

Top central bankers are meeting Sunday in the northern Swiss city of Basel to put the finishing touches on a set of new bank regulations aimed at preventing a repeat of the recent financial crisis.

The new package of rules called Basel III is designed to reinforce the financial stability of banks as well as avoid them from taking on excessive risks.

This translates to raising the level of minimum reserves held by banks and improving the quality of this capital.

While central bankers had reached broad agreement on the standards late July, they have yet to come up with key details, including the amount of the so-called Tier 1 capital ratio or the proportion of capital that banks would need to hold.

Under the existing Basel II rules, the Tier 1 capital ratio was set at four percent while the core ratio is set at 2 percent, but these figures are likely to be raised significantly under new rules, analysts say.

In addition, the capital held would have to be in the form of relatively stable assets that would not lose their value suddenly in crises, as was the case during the subprime crisis of 2008.

Afraid that the new rules could curb their earnings potential, banks have been lobbying against what they describe as excessive regulation.

The head of the German savings bank association, Heinrich Haasis, has warned that new bank reserves could lead to total reserve requirements of up to 16 percent of a bank's assets, "more than double" the current level.

Some politicians have also voiced concerns.

French Economy Minister Christine Lagarde had said that it was "imperative not to penalise (the banking sector) by imposing excessive demands."

Bankers in France and Germany estimate that the new rules may require them to raise some 255 billion euros.

The industry has also warned that over-regulation could kill off nascent growth in the economy.

Regulators have sought to calm fears.

A joint assessment by the Financial Stability Board and the Basel Committee on Banking Supervision found that "the transition to stronger capital and liquidity standards is likely to have a modest impact on aggregate output."

The assessment found that for every one percentage point increase in banks' capital ratio, gross domestic product is expected to fall by 0.2 percent.

Phased in over a four-and-a-half year period, this would translate to an average 0.04 percent drop in annual output.

Each 25 percent increase in banks' liquid asset holdings is also expected to cut GDP by 0.08 percent.

Rainer Skierka, analyst at Bank Sarasin, pointed out that big banks were unlikely to face problems setting aside more capital, although medium-sized banks, such as Germany's Landesbanken, may have a tougher time.

He added that shareholders may end up paying for the reforms, as banks will use profits to buffer up their reserves, rather than pay them out as dividends.

"But in return, the banks would be more solid, which would benefit investors," said Skierka.

© 2010 AFP

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