Basel banking rules focus on capital buffer

City A.M. Reporter
CENTRAL bank and regulatory officials agreed tougher new global bank capital rules yesterday but will keep investors on tenterhooks until Sunday when formal endorsement is expected.

The Basel Committee ended its meeting with recommendations on how much extra capital banks will have to hold in future to avoid governments having to bail out the sector in the next crisis, a source familiar with the process said.

It also agreed arrangements for phasing in higher standards on the quality of capital banks must hold in future. “The Basel Committee has said they are on track with their discussions but there will be no announcement today,” a committee spokeswoman said without elaborating further.

The recommendations will be put to the group of governors and heads of supervision, chaired by European Central Bank president Jean-Claude Trichet, which meets in the Swiss town of Basel on Sunday.

The so-called Basel III reform is the cornerstone of the world’s response to the financial crisis and endorsement by Basel’s oversight body will pave the way for the G20 summit of leaders in November to give their seal of approval.

Germany’s Die Zeit newspaper reported on Monday evening that a draft of the finalised package showed banks will have to hold Tier 1 capital of 9 per cent, including a three per cent so-called “conservation buffer”.

At least five per cent of Tier 1 would have to be in the form of pure equity or retained earnings for maximum market shock absorbency. The current Tier 1 ratio minimum is four per cent, with a core pure equity minimum of two per cent.

Germany continued to press for more time to implement the changes so its banks do not have to raise huge amounts of capital quickly.

Analysts and regulators have been expecting the new levels under Basel III to come in at around six per cent for core Tier 1, with a conservation buffer of at least two per cent.

Andrew Lim, an analyst at Matrix Group said the minimum ratios outlined in the newspaper leak were at the more onerous end of what the market had been expecting once the additional buffers are added.