Banking regulators yesterday agreed a package of reforms that will see banks required to hold over triple the amount of capital they are currently required to have in reserve.
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.
But the committee says “important” banks should have loss absorbing capacity beyond the standards announced in the reforms.
The new requirements will be phased in from January 2013 to January 2019.
European Central Bank president and Group of Governors and Heads of Supervision chairman Jean-Claude Trichet says: “The agreements reached today are a fundamental strengthening of global capital standards.”
He adds: “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.”
Netherlands Bank president and Basel Committee on Banking Supervision chairman Nout Wellink says: “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.”
BBA chief executive Angela Knight says the measures are likely to result in an increase cost to the borrower.
She says: “The liquidity requirements are also significant, as these feed through to the price and the availability of lending . A bank is like any other business – if its fixed operating costs go up then so does the price of its product.
“All the changes are good from a stability perspective but add billions to the fixed operating cost of a bank. The consequence is that inevitably the cost of credit – the price the borrower pays for money – will rise. The cheap money era is over.”