Financial Regulatory Forum

Basel group wants stricter bank standards by 2012

December 17, 2009

The Bank for International Settlements (BIS), central bank to the world's central banks, and parent organisation of the Basel Committee on banking supervision. By Sven Egenter and John O’Donnell

ZURICH/BRUSSELS, Dec 17 (Reuters) – Banks face having to hoard more funds or turn to investors for fresh capital within as little as three years under proposals by a body which guides global financial regulation.

Seeking to prevent this year’s financial crisis from being repeated, the Basel Committee of central bankers and supervisors on Thursday demanded stricter rules for the capital which banks maintain to shield their depositors and shareholders from loss.

Although its recommendations are not binding, they herald a tougher regime for banks; regions such as the European Union will use them as a reference, and higher capital requirements may end up slowing down lending or investment banking business. On Thursday, the EU said it was studying the Basel report.

“There were a lot of areas in finance which were hardly regulated, such as investment banking,” said Rym Ayadi, an industry expert with the Centre for European Policy Studies, a think tank.

“If these new rules are implemented…this would be the end of that. It could change the way banks work, making them more focused on financing the real economy.”

European bank shares fell on Thursday partly in response to the Basel Committee’s report, as investors fretted that tighter capital requirements could force banks to issue more shares to raise funds.

TIMELINE

The Basel Committee did not come up with specific numbers for higher capital requirements on Thursday; they will be worked out in consultation with national regulators next year.

The committee wants the changes to take effect by the end of 2012, but they may be postponed if the global economy is still struggling at the time, the committee’s secretary general Stefan Walter told Reuters.

“We are going to do an impact assessment and finalise the proposals by the end of next year. By then, we will also make a decision about the appropriate implementation time line. That depends on the economic development,” he said.

Global regulatory sources told Reuters on Thursday that the new requirements would be implemented gradually and flexibly, giving banks enough time to adjust. Regulatory changes introduced by the committee in 2004 came with 10-year transition periods for some requirements.

However, the latest measures could be revolutionary for some banks; among other things, the committee wants the first-ever global introduction of a leverage ratio, which would force each bank to set aside a fixed amount of capital based on the size of its balance sheet.

The committee also aims to restrict the type of capital on which a bank can rely to prove its financial stability. In future, lenders should primarily use retained profits and shareholder equity, the most liquid form of assets on a bank’s balance sheet, the committee said.

This is in stark contrast with the past, when banks relied on wide range of assets, many of which crumbled during the financial crisis.

For a graphic on the capital strength of world banks, click on http://graphics.thomsonreuters.com/129/GLB_BNKCP1209.gif

(Additional reporting by Krista Hughes, Jonathan Gould and Alexander Huebner in Frankfurt; Editing by Andrew Torchia)

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