BASEL, Switzerland – Global financial regulators on Sunday agreed on new rules designed to strengthen bank finances and rein in excessive risk-taking to help prevent another crisis.
Banks will be forced to hold more and safer kinds of capital to offset the risks they take lending money and trading securities, which should make them more resistant to financial shocks such as those of the last several years.
European Central Bank President Jean-Claude Trichet, chairman of the committee of central bankers and bank supervisors that worked on the new rules, called the agreement “a fundamental strengthening of global capital standards.”
“Their contribution to long-term financial stability and growth will be substantial,” Trichet said in a statement.
U.S. officials including Federal Reserve Chairman Ben Bernanke in a joint statement called the new standards a “significant step forward in reducing the incidence and severity of future financial crises
Some banks have protested however that the new rules may hurt their profitability and cause them to reduce the lending that fuels economic growth, possibly dampening a global economic recovery.
Representatives of major central banks, including the ECB and the U.S. Federal Reserve, agreed to the deal at a meeting in Basel, Switzerland, on Sunday. The deal still has to be presented to leaders of the Group of 20 forum of rich and developing countries at a meeting in November and ratified by national governments before it comes into force.
The agreement, known as Basel III, is seen as a cornerstone of the global financial reforms proposed by governments following the credit crunch and subsequent economic downturn caused by risky banking practices.
Earlier this year the Brussels-based European Banking Federation warned that the new global rules forcing banks to put aside more capital could keep the eurozone economy in or close to recession through 2014.
The federation said its analysis of proposed new Basel III banking standards would limit eurozone banks’ credit growth and profits, hurt the economy and prevent the creation of up to 5 million jobs in the 16 nations that use the euro.
Under the agreement, banks will have six years starting Jan. 1, 2013, to progressively increase their capital reserves. Under current rules banks have to hold back at least 4 percent of their balance sheet to cover their risks. Starting in 2013, this reserve – known as tier 1 capital – will have to rise to 4.5 percent, reaching 6 percent in 2019.
In addition, banks will be required to keep an emergency reserve known as a “conservation buffer” of 2.5 percent. In total, the amount of rock-solid reserves each bank is expected to have by the end of the decade will be 8.5 percent of its balance sheet.
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