Global bankers agree on new capital reserve rules

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.

At
present the “tier one capital ratio” is 4 per cent. The ratio is a
measure of banks’ cushion against future losses.

Our
correspondent says in future it will be at least 7 per cent.

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

Any
agreement will still need to be ratified by the heads of government of the G20
group of nations at their summit in November.

The tier
one capital ratio is made up of equity – its shares – and retained earnings. If
a bank makes losses on loans, it is the shareholders who take this loss.

However,
once all of a bank’s equity is eaten up by losses, the bank becomes insolvent –
in other words its assets are no longer worth enough to repay all of its debts.

The new
requirement should prove little problem for UK banks, as it is in fact lower
than the 8-9 per cent ratio currently held by them.

It is
also well below the 10 per cent 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.

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