13 Sep 2010

Major bank reform proposed to avert another crisis

12:31 pm on 13 September 2010

World bankers and regulators have agreed on a package of sweeping reforms that they hope will prevent a repeat of the global financial crisis of 2008.

The most important of the measures, drawn up at a meeting in the Swiss city of Basel, is a requirement for banks to hold much higher reserves of capital.

The BBC's business editor says the deal is an important milestone in banking reform. He says it should mean banks having a greater ability to absorb losses in future crises without taxpayer help.

Lord Turner, chairman of the UK's Financial Services Authority, says the new rules represented "a major tightening of global capital standards and will play a major role in creating a more resilient global banking system".

In a joint statement, the US Federal Reserve and other major US banking regulators said the deal "provides for a more stable banking system that is less prone to excessive risk-taking".

Common equity level to rise

Low levels of capital relative to assets were a major factor in the global crisis, the BBC reports.

Under the new agreement, the amount of common equity - the best capital for absorbing losses - that banks have to hold will rise from 2% of their loans and investments to 7%, meaning they must have $7 in their vaults for every $100 in customers' accounts.

If banks' capital ratios fall below 7%, regulators may place restrictions on their ability to pay dividends and bonuses.

The biggest banks - whose failure could bring down the entire financial system - will have to hold even more capital.

The agreement, due to come into effect from 2013 and be phased in over several years, still needs to be ratified by the heads of government of the G20 group of nations at their summit in November.

The new requirement is still well below the 10$ level that was being pushed for by Britain, the United States and Switzerland.