With Basel III deal done, regulators turn to big bank issue

13th September 2010, Comments 0 comments

Regulators on Monday weighed further reforms targeting banks sometimes deemed too big to fail just hours after they announced landmark changes to capital requirement rules.

The tougher rules unveiled late Sunday, called Basel III, would triple the minimum reserves that banks would have to hold against losses, thereby bolstering their resilience in the face of crises.

While hailing the reforms, central bankers said the package still did not address a "moral hazard problem" arising from the fact that some major banks are simply too big or too significant to the economy to be allowed to fail.

The global financial crisis in 2007-2008 forced many governments in developed nations to rescue banks, since allowing them to fold could have brought down whole economies.

Central bankers now want to find a way to ensure that such major financial institutions can be allowed to fail if they run into trouble without damaging national economies.

Such banks can also expect to see further curbs and their capital buffer is expected to be raised further, central bank regulators said.

"It's not done! We have now a second part which is very, very important -- to address the problem of the systemically important institutions," said Mario Draghi, speaking as the chairman of the Financial Stability Board.

If such major banks were to get into trouble in the future, there must be a way to wind them up "without creating the huge market disruptions that we have seen and without dipping in taxpayers money purse," added Draghi, who is also Italy's top central banker.

Central bankers meeting at northern Switzerland's Bank for International Settlements agreed Sunday on new overall rules for banks to be phased in from 2013.

Banks of all sizes would be required to hold more reserves by January 1, 2015, with the "minimum requirement for common equity, the highest form of loss absorbing capital," raised to 4.5 percent of overall assets from 2.0 percent at the moment.

So-called Tier One capital, a wider measure of top-quality capital, has been re-defined on a tighter basis and increased from 4.0 to 6.0 percent over the same period.

In addition, banks would be required by January 1, 2019 to set aside an additional buffer of 2.5 percent to "withstand future periods of stress," bringing the total of such core reserves required to 7.0 percent.

This additional reserve helps "to ensure that banks maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress," said regulators.

They added that the tool would help stop banks from issuing "discretionary bonuses and high dividends, even in the face of deteriorating capital positions."

Meanwhile, the Tier One capital requirement being raised to 6.0 percent from 4.0 percent includes common equity and other specific financial instruments.

Some assets would also no longer be considered as appropriate reserves, and would have to be replaced by better quality assets beginning 2013.

However, banks were given nine years to implement the new rules, far longer than the end-2012 deadline that was suggested late last year.

Many major financial institutions have in recent months already moved to boost their reserves to meet the requirement.

European Central Bank chief Jean-Claude Trichet, the chairman of the group of regulators who met in northern Switzerland on Sunday, said that the deal reached was a "fundamental strengthening of the global capital standards."

He said on Monday: "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 set of new regulations would be submitted for ratification at a meeting of Group of 20 major developed and developing nations in South Korea in November.

Bank shares rallied across Asia and Europe following the announcement.

Banks have been campaigning in recent weeks against what they describe as over-regulation, warning that it could kill off nascent growth in the economy.

Dutch central bank governor Nout Wellink estimated that banks would require "hundreds of billions" in order to meet the new rules, but pointed out that the long timeframe for implementation would help banks and the economy to cope.

© 2010 AFP

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