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Global Bankers Adopt New Capital Rules Designed To Prevent Future Crises

  • RFE/RL

European Central Bank chief Jean-Claude Trichet said this "fundamental strengthening of the global capital standards" would make a substantial "contribution to long-term financial stability."

European Central Bank chief Jean-Claude Trichet said this "fundamental strengthening of the global capital standards" would make a substantial "contribution to long-term financial stability."

Bankers and regulators from around the world have approved a new set of rules aimed at strengthening banks so they can better withstand future economic storms.

The new regulations were adopted at a meeting of central bankers and senior financial officials from 27 countries. including from the United States and Russia, in the Swiss banking capital Basel.

They more than triple the level of capital that banks must hold in reserve against the possibility that loans may prove to be bad investments.

The level of reserves set by the September 12 meeting of the Basel global bankers' committee is a minimum of 7 percent of the banks' loans and investments. That compares with 2 percent under the old rules.

The aim of this is to lessen the exposure of banks which have made risky loans, typically in times of economic expansion, and which find themselves unable to collect their money at times of economic downturn, or for any other reason.

The chairman of the bankers' meeting, European Central Bank President Jean-Claude Trichet, said this "fundamental strengthening of the global capital standards" would make a substantial "contribution to long-term financial stability."

A Swiss member of the Basel global bankers' committee, Daniel Zuberbuehler, said the new capital requirements would enable the banks to withstand larger shocks without relying on government support. As a result, the global financial system will be more resilient.

As quoted by Reuters news agency, Zuberbuehler also said the current financial crisis highlighted the fragility of the banking sector, making such a reform "indispensable."

Strangling Recovery?

But not everybody is so sure that the Basel group has applied the right medicine. An article in "The New York Times" today says that the capital requirements and other measures in the same package could significantly alter the way banks do business.

The article quotes Scott Talbott of the Financial Services Roundtable, which represent the largest U.S. banks, as saying "the high capital level will decrease the ability of banks to lend."

This in turn could take a toll on the fragile growth being experienced as countries haul themselves out of the current recession.

To counter this, the Basel committee has set a long timetable for implementation of the so-called Basel III accord. The main capital requirement is to be implemented only by 2015, with a supplementary "buffer fund" set for 2019.

The Basel III accord is not yet set in stone. It must be approved by the Group of 20 (G20) summit in Seoul in November, and then must be ratified by national parliaments.

written by Breffni O'Rourke, with agency reports
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