Bankers Agree To New Global Rules Designed To Prevent Future Financial Crisis
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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.
Fred Cannon, a banking analyst at Keefe, Bruyette & Woods, said the rules probably will reduce bank profit margins and lending from the heights they reached in 2007. But he added that before 2000 or so, many U.S. banks were already operating with enough capital reserves to meet the new minimums.
Cannon said the new standards certainly will not keep the banks from lending more than they did last year, when lending shrank mainly because businesses and consumers decided to save instead of borrow. But he expressed doubts on whether the new rules will avert another crisis.
The trouble last time, he said, was that banks were hiding the full extent of the risks they had taken. And there is no guarantee they won't find new ways to appear more conservative than they are under the new regime, he said.
"Government regulations tend to fix the last crisis," he said. "Whether it will prevent the next one is the question."
Earlier this year, the Brussels-based European Banking Federation warned that the rules could keep the 16 nations that use the euro in or close to recession through 2014.
The federation, which represents more than 5,000 banks, said its analysis of proposed new Basel III banking standards shows that it would limit banks' credit growth and profits, hurt the economy and prevent the creation of up to 5 million jobs in the eurozone.
U.S. agencies have the authority to institute tougher capital standards under the sweeping financial overhaul legislation that Congress passed and President Barack Obama signed into law in July. The new global rules are expected to be endorsed by Obama and other leaders of the Group of 20 major economies when they meet in November in Seoul, South Korea.
Treasury Secretary Timothy Geithner has been leading the effort among G-20 finance ministers to get international backing for the new capital standards. He has argued that the rules must be implemented in a coordinated manner so countries don't try to obtain unfair advantages by allowing their banks to operate under less stringent standards.
Regulators on Sunday also agreed to a number of other measures to shore up the stability of financial institutions:
_ Countries will be able to demand that banks build up a further reserve during good times amounting to up to 2.5 percent of their common equity. This "countercyclical buffer" is to help avoid excessive lending during periods of economic boom.
_ Another measure aimed at preventing banks from overstretching themselves is the introduction of a leverage ratio of 3 percent. Leverage, or borrowing to invest elsewhere, boosts returns but can backfire catastrophically if an investment declines. Some European banks had objected to this, arguing that the measure unfairly penalizes small lenders with relatively safe credit portfolios.
_ Regulators also agreed to continue working on additional safeguards for "systemically important banks" – those that could bring down entire economies if they collapse.
Already one bank has cited the new rules as a reason to tap the market for billions of euros in new capital.
Earlier Sunday, Germany's biggest bank, Deutsche Bank AG, announced plans to raise at least 9.8 billion euro ($12.4 billion) in a capital increase.
The planned issue of 308.6 million new common shares is meant primarily to cover the consolidation of Postbank, "but will also support the existing capital base to accommodate regulatory changes and business growth," Deutsche Bank said. It did not elaborate.
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Associated Press writers Andrew Vanacore in New York, Martin Crutsinger in Washington, Frank Jordans in Geneva and Geir Moulson in Berlin contributed to this report.
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GREG KELLER 09/12/10 07:05 PM ET Associated Press