Bank shares rally despite new tough rules on capital

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Bank shares rose on Monday despite new "landmark" rules raising capital held by financial bodies to avert another crisis like the one which nearly broke the system two years ago.

The new rules, called Basel III, would force banks to more than triple their current reserves.

They would raise the capital base as a form of insurance against sudden strains in the system or on any particular financial institution, and would be phased in from 2013, a statement from the Bank for International Settlements, the so-called central bankers' bank, said.

The long-awaited but controversial regulations amount to the highest-profile response to chaos in the global financial system in 2007-2008 which forced governments to rescue banks, tipped many economies into recession and added hugely to national debt in Europe and the United States.

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: "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."

Under the new rules to be phased in from 2013, banks would be required to hold more reserves by January 1, 2015, with the so-called core Tier 1 capital raised to 4.5 percent of overall assets from 2.0 percent at the moment.

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 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 this tool would go towards stopping banks from issuing "discretionary bonuses and high dividends, even in the face of deteriorating capital positions".

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

Big banks of systemic importance can expect to see further curbs, as regulators also noted in their statement that they "should have loss absorbing capacity beyond the standards announced today and work continues on this issue".

"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," said Nout Wellink, who heads the Dutch central bank.

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 which has been largely anticipated.

An analyst from Bank Vontobel said that the 7.0 percent "is in the lower end of what had been expected."

Japan's banking supervisory agency said major banks of the Asian economic power would be able to meet the new rules, while Singapore's main lenders also voiced confidence and pointed out that the agreement provided more clarity.

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.

German banks have been particularly vocal in raising their fears over the past week, but the head of the German central bank Axel Weber said there was sufficient time for banks to adjust to the new rules.

"The gradual transition phase will allow all banks to meet the requirements," said Weber.

"Even the particular nature of German financial institutions ... have been correctly taken into account," he added.

Switzerland's top central banker Philipp Hildebrand said the "landmark agreement sets a much needed new global regulatory minimum standard for banks" but warned that the package "does not yet comprehensively address the 'too big to fail' problem".

"Further efforts will be required in that area at the international and at the national level," said Hildebrand.

© 2010 AFP

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