World Panel Backs Rules to Avert Banking Crises
Top central bankers and bank regulators agreed Sunday on far-reaching new rules for the global banking industry that are designed to avert future financial disasters, but could also dampen bank profits and strain weaker institutions.
Officials confirmed that the panel of financial authorities from 27 countries had reached agreement Sunday afternoon and would release details later Sunday. The group includes Ben S. Bernanke, chairman of the Federal Reserve, and Jean-Claude Trichet, president of the European Central Bank.
If ratified by the G-20 nations later this year, the rules, known as Basel III, will require banks to bolster the amount of low-risk assets they hold in reserve as a cushion against market shocks. While the American Bankers Association and other groups have complained about the provisions, other bankers said the rules will help avert crises of the kind that nearly plunged the world into depression in late 2008.
“Banks will unarguably be safer institutions,” said Anders Kvist, head of treasury at SEB, a bank based in Stockholm that has operations around Europe.
Analysts had expected the Basel group to sharply raise the most bulletproof category of reserves, known as core Tier 1 capital, to about 8 percent of bank assets from as little as 2 percent under current rules.
In addition, regulators were expected to oblige banks to raise their reserves even more during boom times, as insurance against a sudden market collapse. Banks would have to add an additional 3 percent of assets to their reserves, to a total of about 11 percent.
Some analysts predicted that banks might even be required to set aside as much as 16 percent in boom times.
The regulators were also expected to impose a so-called leverage ratio, a new requirement which would oblige banks to maintain reserves of at least 3 percent of total assets, including derivatives or other instruments that they might not carry on their balance sheets.
The leverage ratio is an attempt to force banks to hold reserves against all their money at risk, with no leeway to game accounting rules.
The rules, which also require adoption by individual nations, will be phased in gradually to give banks plenty of time to adjust. Some banks may face market pressure to stock up on capital sooner, but the impact may be less than feared because many banks have already increased their reserves in anticipation of the new rules or are planning to do so.
Deutsche Bank in Frankfurt said Sunday that it would sell shares worth 9.8 billion euros ($12.5 billion) beginning at the end of this month, primarily to finance the acquisition of Postbank, a German retail bank, but also to bolster its reserves.
Analysts say that most United States institutions already comply with the new rules, but that some European banks will need to raise more money either by holding on to profits that they may have otherwise distributed to shareholders, or by selling new stock.
Among the institutions that might need to raise more money are Société Générale in France and Lloyds in Britain as well as Deutsche Bank, according to calculations by Morgan Stanley made before the new rules were announced. Other banks whose current capital reserves might not be sufficient under the new rules are Royal Bank of Scotland and Barclays in Britain, and Crédit Agricole in France, according to Nomura Equity Research.
Banks that have already increased their capital, such as SEB or UBS in Switzerland, will be in a better position and may be able to pay out profits to shareholders that they had been husbanding while policymakers debated the new regulations.
"“The financial system is not going to go back to the bad old ways.”"
Mr. Kvist of SEB would not comment on the institution’s dividend plans, but added that the decision in Basel gives bankers more certainty about what to expect from regulators.
“It is a milestone,” Mr. Kvist said by telephone, speaking ahead of Sunday’s decision in Basel. “There will be more security in how to plan your balance sheet going forward, and that’s a very good thing.”
The Group of Central Bank Governors and Heads of Supervision, under the chairmanship of Mr. Trichet of the European Central Bank, met for most of the day in the headquarters of the Bank for International Settlements, an institution in Basel that acts as a clearinghouse for the world’s central banks. The panel, which also includes central bank chiefs and regulators from China, Japan and most other major economies, was debating rules previously formulated by the Basel Committee on Banking Supervision.
The meeting was preceded by energetic last-minute lobbying by the banking industry, which fears the rules will hurt profits, and has warned that lending to business and individuals could suffer.
American banks are particularly opposed to a new proposal requiring that banks keep a “conservation buffer” as part of the capital they must hold. If the banks’ capital levels dropped below the buffer, the banks could face new restrictions on the compensation they pay their executives or the dividends they pay their shareholders. “A one-size-fits-all buffer is inappropriate in many cases and could have serious, negative unintended consequences,” Mary Frances Monroe, a vice president at the American Bankers Association, wrote last week to the Basel Committee.
But many analysts and even some bankers say the rules could make the banking system more resilient, and ultimately help restore confidence in an industry that is still recovering from the financial meltdown that followed the bankruptcy of investment bank Lehman Brothers in late 2008.
The rules also include other provisions designed to make the financial world more transparent — for example, giving banks incentives to trade exotic derivates on open markets rather than secretly between institutions.
Underlying the continued fragility of the banking system, German officials said Friday that they would add another 40 billion euros (about $50 billion) in guarantees for Hypo Real Estate, a bank in Munich that belongs to the government following a bailout. The additional funds bring the total guarantees to 142 billion euros.
A leap of faith, possibly off a cliff.
Created in 1974 after a German bank failure disrupted world currency markets, the Basel Committee has grown in significance as a forum for coordination on bank supervision as financial institutions have expanded their reach, though its work is not binding in the absence of enactment by individual participating countries.
In the wake of the 2008 crisis, experts identified a fundamental flaw in the Basel II standards, issued in 2004. Those standards allowed the biggest, most sophisticated banks to use their own credit-risk models in calculating how much capital they had to hold. In relying on a system of internal ratings that was “essentially untested,” regulators were “taking at least a leap of faith and, critics fear, possibly a leap off a cliff,” Daniel K. Tarullo, a law professor, wrote in a 2008 book.
Mr. Tarullo — now a governor of the Federal Reserve, representing the central bank at Basel alongside Mr. Bernanke — wrote that the weaknesses of the system “are multiplied as more countries adopt it, while the difficulties in effective monitoring of its implementation” undermined the benefits of having multiple countries adopt it.
Even so, he added that it was impractical to abandon the Basel framework and urged instead that the committee work to improve definitions of capital, set leverage ratio requirement and force banks to hold subordinated debt, which is riskier than corporate bonds and gives creditors an incentive to monitor the borrower’s financial health closely.
Mr. Kvist of SEB said that credit was likely to become more expensive for borrowers as a result off the Basel III rules, but that the extraordinarily low interest rates of recent years were not sustainable in any case. “The cost of liquidity was simply too low leading up to the crisis,” he said.
Banks’ return on equity could be lower than before the crisis, Mr. Kvist said. But he added that the figures some institutions reported in years past were possible only because banks underestimated their risk. Shareholders will be better off because returns will be less volatile, he said.
“The financial system is not going to go back to the bad old ways,” he said.
Sewell Chan contributed reporting from Washington.