Major bank operators and senior regulators have agreed a new deal which will see banks hold more capital in reserve in a bid to prevent another economical downturn.
Experts say the rule, known as Basel III, should help banks to absorb losses in future crises without needing to turn to the taxpayer for help. Low levels of capital relative to assets were believed to be one of the major factors behind the last global recession.
The current amount of common equity that banks need to hold currently stands at 2% of their loans and investments, however the new regulations require banks to hold 7%. This 7% also includes a 2.5% ‘buffer’, which has been designed to protect banks against periods of difficulty.
The rules will come into effect in 2013 and will be phased in. It’s thought the biggest banks may have to hold more than 7% in reserves – something which shouldn’t be a problem for UK banks that currently hold a 8-9% ratio.
The regulations have received mixed responses. Some financial experts believe that the new rules could lead to a new credit crunch, however the majority seem to be enthusiastic about the changes.
European Central Bank chief Jean-Claude Trichet said the new rules were “a fundamental strengthening of global capital standards”, while the US Federal Reserve said the deal “provides for a more stable banking system that is less prone to excessive risk-taking”.