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Financial Planning > Behavioral Finance

World Regulators in Basel Set New Rules for Banks

By Marlene Y. Satter

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Global financial regulators on Sunday, September 12, reached consensus on new rules that were aimed at cutting “excessive risk-taking” and shoring up bank balance sheets.

The Basel III agreement, as it is known, requires banks to hold more and safer kinds of capital so that the risks they take in lending and trading are better offset. While some banks have protested that such rules will hamper their lending ability and hurt profitability, Jean-Claude Trichet, president of the European Central Bank and chairman of the committee of central bankers and bank supervisors that devised the rules, cited the agreement as “a fundamental strengthening of global capital standards.”

Representatives from such banks as the ECB and the U.S. Federal Reserve agreed to the new rules on Sunday in Basel, Switzerland. The agreement must still be presented to the Group of 20 and ratified before it takes effect.

Banks will have six years, under the new rules, to raise their capital reserves. Those reserves, currently set at 4%, will rise progressively from 4.5% to 6% beginning in 2013 and concluding in 2019. Banks must also maintain an emergency reserve of 2.5%; this “conservation buffer” and the additional reserves must total 8.5% of each bank’s balance sheet by the end of the decade.

Several other requirements are included in the new rules, including the ability of countries to demand that banks build up additional reserves of 2.5% during good times as a “countercyclical buffer,” and the introduction of a leverage ratio of 3%.

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