Leading central bank governors said on Sunday that they had agreed on a package of measures to strengthen the regulation and supervision of the banking industry in the wake of the financial crisis.
The measures should “substantially reduce the probability and severity of economic and financial stress,” a statement released by the Basel-based Bank for International Settlements (BIS) said.
The approval sets in motion and enhances revised “Basel II” measures finalized in July, that require banks to bolster capital and remedy flaws exposed by the collapse in credit and financial markets last year.
“The agreements reached today among 27 major countries of the world are essential as they set the new standards for banking regulation and supervision at the global level,” said European Central Bank chief Jean-Claude Trichet, who presided the meeting.
National financial supervisors were also urged to ensure that pay or compensation for commercial bankers was “properly aligned with long-term performance and prudent risk-taking,” said Nout Wellink, chairman of the Basel Committee and Dutch central bank chief.
However, the meeting did not set a firm date for implementation of the package, which will be fleshed out over the coming months.
The central bank governors and supervisors who met in Basel form the oversight body of the Basel Committee on Banking Supervision.
A draft of the measures was first unveiled in January.
The principles agreed notably to bolster standards for key “tier one” capital requirements for commercial banks to raise their “quality, consistency and transparency,” the statement said.
“Banks will be required to move expeditiously to raise the level and quality of capital to the new standards, but in a manner that promotes stability of national banking systems and the broader economy,” it said.
The central bankers endorsed the principle of a minimum global standard to fund liquidity, as well as a framework to oblige banks to build permanent “countercyclical” capital buffers that can be used during periods of financial turmoil.
“These measures will result over time in higher capital and liquidity requirements and less leverage in the banking system, less procyclicality, greater banking sector resilience to stress,” Wellink said.
The measures will be detailed by the end of the year and tested and refined through to the end of next year, the statement said.
They will be introduced gradually in a manner “that does not impede the recovery of the real economy.”
The central bankers meeting came on the heels of a meeting of G20 finance ministers in London on Saturday that painfully hatched a compromise on bankers’ pay and left several financial issues outstanding.
US Treasury Secretary Tim Geithner notably went to London seeking an agreement ensuring that banks were better prepared for tough times.
But he admitted afterwards: “We still need to reach agreement on the level of capital ratio.”
Amid disagreement in their ranks, the G20 ministers fell short of capping bankers’ pay but pledged to reward long-term, not short-term success.
Most of the issues were left for a crucial meeting of G20 leaders in Pittsburgh, Pennsylvania, on Sept. 24 to Sept. 25.
Capital requirements underpin a bank’s business and deposits.
Adequate capital reserves should help avoid sudden collapses like those that occurred a year ago, precipitating the financial crisis and massive state support packages for big banks in several economies.
The existing Basel II accord, finalized in 2004, had already bolstered and expanded on earlier international capital standards for banks.
But it took several years to negotiate amid resistance to some of the criteria in the banking industry.
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