MercoPress. South Atlantic News Agency

Central bankers agree new rules to prevent a repeat of the financial crisis

European Central Bank chief Jean-Claude Trichet

Central bank governors and senior regulators have agreed new rules designed to prevent a repeat of the recent financial crisis. At a meeting in the Swiss city of Basle, they agreed a deal requiring banks to hold more capital in reserve.

BBC business editor Robert Peston 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, said 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”.

European Central Bank chief Jean-Claude Trichet said the new regulations - called Basle III - were “a fundamental strengthening of global capital standards”.

“The transition arrangements will enable banks to meet the new standards while supporting the economic recovery,” he added.

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”. Low levels of capital relative to assets were a major factor in the recent global financial crisis.

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 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%.

The 7% includes a 2.5% “conservation buffer” to protect banks against periods of difficulty or stress. 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. Our correspondent says some banks fear the new rules could lead to a new credit crunch.

But regulators say that if they are phased in over several years, it will not undermine economic recovery.

The new requirement should prove little problem for UK banks, as it is in fact lower than the 8-9% ratio currently held by them. It is also well below the 10% level that was being pushed for by the UK, the US and Switzerland.

The updated rules will mean some banks will need to raise a lot more money from shareholders.

The rules may have the effect of limiting lending, at least in the short term, as most banks - particularly those in Europe - have too little capital for the loans they have already made. (BBC).-