Basel, Switzerland Banks will have to significantly increase their capital reserves under rules endorsed Sunday by the world’s major central banks, which are trying to prevent another financial collapse without impeding the fragile economic recovery.
The new banking rules are designed to strengthen bank finances and rein in excessive risk-taking, but some banks have protested that they may dampen the recovery by forcing them to reduce the lending that fuels economic growth.
Forcing banks to keep more capital on hand will restrict the amount of loans they can make, but it will make them better able to withstand the blow if many of those loans go sour. The rules also are intended to boost confidence that the banking system won’t repeat past mistakes.
Under current rules, banks must hold back at least 4 percent of their balance sheet to cover their risks. This mandatory reserve — known as tier 1 capital — would rise to 4.5 percent by 2013 under the new rules and reach 6 percent in 2019.
In addition, banks would 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.
U.S. officials including Federal Reserve chairman Ben Bernanke issued a joint statement calling the new standards a “significant step forward in reducing the incidence and severity of future financial crises.”
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” that will encourage both growth and stability.
Representatives of the Fed, the ECB and other major central banks agreed to the deal Sunday at a meeting in Basel, Switzerland. It 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 stung by the experience of having to bail out some ailing banks to avoid wider economic collapse.