Watchdogs strike back

13 September 2010 By Peter Thal Larsen Follow @Peter_TL

Two years after Lehman collapsed, regulators have agreed higher standards for bank capital. Hawks will be disappointed with the 7 pct minimum equity ratio, which will be phased in over eight years. Most investors will be relieved. Even so, the new rules are a big step forward.

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The Group of Governors and Heads of Supervision, which oversees the Basel Committee on Banking Supervision, on Sept. 12 announced a new set of minimum capital standards for global banks.

Under the reforms agreed, the minimum common equity that banks must hold formerly known as core Tier 1 will rise to 4.5 percent of riskweighted assets, from 2 percent today.

The minimum ratio of Tier 1 capital will rise to 6 percent, from 4 percent. The minimum level of total capital is unchanged at 8 percent.

But banks must hold a capital conservation buffer, in the form of equity, of an additional 2.5 percent. This takes the total common equity ratio to 7 percent.

The new common equity standard will be in place by January 2015, while the capital conservation buffer will be phased in between January 2016 and January 2019.

Regulators also agreed to introduce a countercyclical capital buffer of up to 2.5 percent, to be varied throughout the economic cycle. The implementation will be left to national authorities.

Systemically important banks should have lossabsorbing capital beyond the standards announced, the regulators said.

Regulators said they would also test a leverage ratio, which will require banks to hold Tier 1 capital equivalent to at least 3 percent of total assets.

Capital instruments such as hybrid debt will be phased out over 10 years from 2013.

Regulators also agreed that mutuals and cooperative banks would be given longer to adjust to the new capital rules.

Basel announcement