Basel Group Agrees to New Global Rules for Banks

Jul 27, 2010 — New York Times

PARIS — Central bankers and regulators have reached an almost-unanimous preliminary agreement on new standards to reinforce the stability of the global financial system, adding to investor confidence in the outlook for many banks.

Under the new requirements, banks would have to hold more in capital reserves and more cash on their balance sheets to cushion against unexpected shocks, though regulators have not specified a minimum amount.

One country — Germany — felt that it needed more time to negotiate accords that it feels could disadvantage some of its lending institutions.

The rules, developed after lengthy negotiations among regulators on the Basel Committee on Banking Supervision, would not take effect for at least seven years.

The standards announced Monday are less onerous than earlier proposals and give banks more leeway to define what counts as high-quality, or Tier 1, capital.

A compromise was struck after private banks and regulators warned that raising capital standards too quickly could choke lending and economic growth. Bankers also fear that having to set aside more capital could reduce profits and ultimately result in lower bonuses for bank employees.

Germany, alone among the 27 countries participating in the committee, declined to sign onto the accord for now.

“We’re still working on it and criticized some of the main design elements,” said Peter Trautmann, spokesman for the Bundesbank. “This is an ongoing process and we’re already further down the road than we’d imagined.”

Sabine Reimer, a spokewoman for the German regulator Bafin, added: “We would like to have the ‘whole package’ before a decision is made.”

Officials stressed that there still was plenty of time: The committee is expected to meet in November to complete the new rules, which will begin to take effect next year.

The announcement helped banking shares to push higher in Europe on Tuesday. Analysts said there was relief that the measures were not as punishing as they might have been.

The financial sector of the Stoxx 600 index of European shares was up 3 percent around midday, against the broader index, which added just 0.3 percent. Shares in Société Générale of France surged 7.5 percent, adding to a 5.3 percent gain Monday in the wake of the stress test by regulators on European banks.

The standards were praised by central bankers who have fresh memories of the collapse of Lehman Brothers and the market chaos that followed in the fall of 2008.

“The agreements reached today are a landmark achievement to strengthen banking sector resilience in a manner that reflects the key lessons of the crisis,” said Jean-Claude Trichet, president of the European Central Bank and chairman of the Basel Committee.

In a nod to concerns about the short-term effects of the new rules, Mr. Trichet added, “We will put in place transition arrangements that will ensure the banking sector is able to support the economic recovery.”

In the next few months, the regulators will conduct a detailed analysis of how the standards would affect the biggest banks in Europe, Asia and the United States.

Under the plan, banks will have until as early as 2018 to comply with a requirement that they hold at least $3 in capital for every $100 they lend — a so-called leverage ratio of 3 percent. A leverage ratio is considered the broadest measure of a bank’s financial strength. The regulators said the final amount might be adjusted.

Whatever the amount, the requirement should have little effect on U.S. institutions, which already meet the 3 percent standard easily. Some European and Asian banks could have to reinforce their financial positions.

Regulators granted a broader definition of what qualifies as capital than some bank analysts had expected.

For example, European banks persuaded regulators to allow part of their stakes in other banks to count toward their Tier 1 capital. U.S. and Asian institutions successfully lobbied to preserve local rules that let them count a percentage of future tax deductions for losses as Tier 1 capital.

Citigroup, for instance, carries a $50 billion tax benefit on its books, largely because of losses during the financial crisis. Bank of America has a $31 billion credit from similar charge-offs.

The German concerns relate to the definition of capital and the leverage ratio, according to officials.

Specifically, it does not want its privately held savings and cooperative banks — which are crucial in financing the small and medium-sized enterprises that drive the economy and survived the financial crisis unscathed — to be forced to raise certain types of capital, and hence alter their business models.

“One country still has concerns and has reserved its position until the decisions on calibration and phase-in arrangements are finalized in September,” the committee said in a footnote to its statement.

Eric Dash and Nelson D. Schwartz reported from New York.