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Banks face big rise in capital requirements

Banking regulators have agreed a package of reforms that will more than triple the amount of capital banks are required to hold in reserve under Basel III.

The group of governors and heads of supervision, the oversight body of the Basel Committee, agreed the minimum common equity requirement should be increased from 2 per cent to 4.5 per cent.

Banks will also be expected to hold a “conservation buffer” of 2.5 per cent to withstand future periods of stress, bringing the total requirement to 7 per cent.

The committee adds that systemically important banks should have loss-absorbing capacity beyond the standards announced in the reforms.

The measures will be ratified by heads of governments at the G20 summit in November and will be phased in between January 2013 and January 2019.

European Central Bank president and group of governors and heads of supervision chairman Jean-Claude Trichet says the reforms are a fundamental strengthening of global capital standards.

He says: “Their contribution to long term financial stability and growth will be substantial. The transition arrangements will enable banks to meet the standards while supporting the economic recovery.”

PricewaterhouseCoopers director Richard Barfield says that the quality of capital that banks have to hold is increasing as well as the overall percentage.

He says: “1 per cent core tier 1 capital under Basel III ’new money’ is more expensive than 1 per cent ’old money’ under Basel II. This means that even if there was no change in the minimum percentage, it would result in a significant increase in the capital most banks need.

“There are lots of moving parts at play here, from leverage to capital to liquidity. Banks need to manage the interaction between these elements carefully.”


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