Even as investors applauded the mostly positive results of recent stress tests of European banks, central bankers and regulators reached a preliminary agreement on Monday on new standards to reinforce the stability of the global financial system.
Under the new requirements banks would have to hold higher capital reserves and more cash on their balance sheets to cushion against unexpected shocks, though regulators have not specified a minimum amount.
The rules, developed after lengthy negotiations among regulators on the Basel Committee on Banking Supervision, would not take effect for at least seven years.
LESS ONEROUS
The standards agreed to on Monday are less onerous than earlier proposals and give banks more leeway to define what counts as high-quality, or Tier 1, capital.
A compromise was struck after private banks and regulators warned that raising capital standards too quickly could choke lending and economic growth. Bankers also fear that having to set aside more capital could reduce profits and ultimately result in lower bonuses for bank employees.
The standards were lauded by central bankers who have fresh memories of the collapse of Lehman Brothers and the market chaos that followed in fall 2008.
“The agreements reached today are a landmark achievement to strengthen banking sector resilience in a manner that reflects the key lessons of the crisis,” said Jean-Claude Trichet, president of the European Central Bank and chairman of the Basel Committee.
In a nod to concerns about the short-term impact of the new rules, Trichet said: “We will put in place transition arrangements that will ensure the banking sector is able to support the economic recovery.”
In the next few months, the regulators will conduct a detailed analysis of how the standards would affect the biggest banks in Europe, Asia and the US. The committee is expected to meet in November to complete the new rules, which will begin to take effect in the US next year.
2018 COMPLIANCE
Under the plan, banks will have until as early as 2018 to comply with a requirement that they hold at least US$3 in capital for every US$100 they lend — a leverage ratio of 3 percent. A leverage ratio is considered the broadest measure of a bank’s financial strength. The regulators said the final amount may be adjusted.
Whatever the amount, the requirement should have little effect on US institutions, which already easily meet the 3 percent standard. Some European and Asian banks may have to reinforce their financial positions.
Regulators granted a broader definition of what qualifies as capital than some bank analysts had expected.
For example, European banks persuaded regulators to allow part of their stakes in other banks to count toward their Tier 1 capital. Lobbying allowed US and Asian institutions to preserve local rules that let them count a percentage of future tax deductions for losses as Tier 1 capital.
Citigroup, for instance, carries a US$50 billion tax benefit on its books, largely because of losses during the financial crisis. Bank of America has a US$31 billion credit from similar charge-offs.
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