European Central Bank President Jean-Claude TrichetTHOMAS LOHNES
Banks will have to set aside more profits as a cushion against hard times and face limits on how much debt they can run up under proposed new global rules agreed by top central bankers and regulators Sunday.
The new framework for bank supervision and risk management follows a call by Group of 20 finance officials Saturday to tackle bank capital requirements and make sure financial institutions insure themselves better against market upheavals and economic downturns.
Central bankers said in a statement the new measures would substantially reduce the probability and severity of economic and financial stress, with concrete proposals to be finalised by the end of the year.
"The agreements reached today among 27 major countries of the world are essential as they set the new standards for banking regulation and supervision at the global level," said European Central Bank President Jean-Claude Trichet, who heads the oversight body for the Basel Committee on Banking Supervision.
The measures include new rules on banks' capital requirements, the introduction of a leverage ratio, a minimum global standard for funding liquidity and a framework for smoothing banks' vulnerability to economic ups and downs.
Regulators will also consider imposing a capital surcharge to mitigate the risk of systemic banks, the central bankers said after meeting at the Bank for International Settlements in the Swiss city of Basel.
Under the proposed new rules, banks will have to raise the quality of their top-tier capital buffers, which must be mainly common shares and retained earnings, and disclose their make-up.
A framework for countercyclical capital buffers above the minimum requirement -- seeking to offset fluctuations in the economic cycle -- will also be laid out.
Leverage ratios limiting the amount of debt banks can run up as a proportion of their capital will be introduced and harmonized internationally, adjusting for differences in accounting, the central bankers said in a statement.
The United States has already introduced leverage ratios but European regulators have been more sceptical: Bank of France Governor Christian Noyer said on Sept. 1 that a simple leverage ratio was unlikely to work as long as there was no single accounting standard.
The central bankers and regulators who make up the Basel Committee also agreed general principles for the transition period to the new rules, including for banks to limit excessive dividend payments, share buybacks and compensation, following an outcry about bankers' pay.
The new rules will also include a minimum global standard for funding liquidity and proposals to reduce the systemic risk associated international cross-border banks.
Basel Committee Chairman Nout Wellink said they were aimed at inserting a layer of big picture perspective into financial regulation.
"These measures will result over time in higher capital and liquidity requirements and less leverage in the banking system, less procyclicality, greater banking sector resilience to stress and strong incentives to ensure that compensation practices are properly aligned with long-term performance and prudent risk-taking," he said.
Government capital injections into banks -- a step taken by many countries in a bid to shore up the financial sector -- will be grandfathered, or exempt from under the new rules.