Regulators meeting in Switzerland agree on new global rules to strengthen banks
Sunday, September 12, 2010; 10:14 PM
Regulators meeting in Basel, Switzerland, on Sunday agreed to take new steps to immunize the financial system from the sort of crisis that pushed the world into recession two years ago.
The new rules would make banks roughly double the amount of capital set aside as a buffer against possible losses, slash stockholder dividends and executive pay if that stockpile falls short, and limit lending during economic boom times. Combined, those measures are intended to shape the behavior of bank managers and investors in unexplored ways - trying, for example, to have them curb lending in good times in the hope that asset bubbles won't give way to a costly bust.
The standards could have broad implications for the amount and cost of credit available around the world, as banks adjust their balance sheets and business plans to comply. Banks will have two years to meet the basic requirements proposed by the committee, though some of its provisions will not be implemented for up to eight years.
The proposal by the Basel Committee on Banking Supervision, comprising Federal Reserve Chairman Ben S. Bernanke and representatives of 26 other countries, will be reviewed by the Group of 20 countries later this fall and would have to be adopted by each national government.
Some financial industry analysts and groups have argued that the stricter standards would slow lending and economic growth. In a statement released after the meeting, the committee acknowledged that the new requirements would force banks, particularly the world's larger ones, to raise a "significant amount of additional capital." But they said the increased stability of the entire system would be worth any short-term crimp in lending.
Jean-Claude Trichet, head of the European Central Bank and chairman of the committee of central bankers and regulators that approved the new standards, said the proposals "are a fundamental strengthening of global capital standards. . . . 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."
Major U.S. bank regulatory agencies, including the Federal Reserve, endorsed the changes in a press release Sunday afternoon.
U.S. Treasury Secretary Timothy F. Geithner said the Treasury welcomed the group's work and would begin reviewing the details. Geithner has often endorsed higher capital standards as central to a stronger financial system.
The agreement settles one of the key outstanding issues in the world's response to the recent crisis. The committee decided that a bank's common equity - the basic capital requirement and essentially money invested by a bank's owners and stockholders that is available to absorb losses - would increase from an amount equal to 4 percent of an institution's loans and other holdings to 7 percent. Of that, 2.5 percentage points would be considered a "buffer" that could be spent down in bad economic times. That would be offset by limits that would then be imposed on executive compensation and dividend payments to stockholders.
In addition, the committee decided each country could raise the capital requirement by as much as 2.5 percentage points during periods of "excess credit growth," which would be up to each country's regulators to define. The aim is to slow lending during boom times and discourage the sort of excessive and risky lending that helped inflate U.S. property prices in advance of the real estate crash.