Basel Committee says agrees bank buffer strategy
LONDON (Reuters) - Banking supervisors published draft rules on Friday that will force banks around the world to build up extra capital in a boom, but gave no hint of what level of funds lenders would be required to hold.
The global committee said it was on track to deliver a complete package of capital and liquidity reforms in time for the November 2010 G20 leaders' summit in Seoul.
Banks would be asked to build up a buffer of capital when national authorities judge that there is excess credit growth together with a build-up of system-wide risk, the Swiss-based Basel Committee said.
"This will help ensure the banking system has an adequate buffer of capital to protect it against future potential losses," it said in a statement.
Spain introduced such buffers after an earlier crisis, and the way its top lenders withstood the current global crisis prompted the G20 to follow suit.
The buffer plan will be finalized by the end of the year and will form part of the main Basel III package, rather than be implemented separately. Banks had hoped of a delay in the countercyclical buffer plans.
The buffer will normally be set at zero but if a credit boom starts, banks would have to begin hoarding extra cash in case the upswing turns sour and hobbles the sector.
Markets had been hoping the committee would give some hints on what the new, higher levels of capital will be in the final package to clear uncertainty hanging over bank stocks, but the draft did not contain specific details.
Banks would be given a year to build their capital buffers to the required level before restrictions are slapped on dividends and other distributions of earnings.
It would sit above a capital "zone" that banks will have to maintain on top of their new minimum capital requirements.
The Basel Committee, made up of central bankers and supervisors from the G20 and other countries, ended a two-day meeting on Thursday where they began to finalize a package of tough reforms aimed at ensuring banks have enough capital and liquidity to withstand major shocks without taxpayer aid again.
A fleshed-out package will be presented to the committee's oversight body later this month for endorsement.
"NO ELEMENTS DITCHED"
Banks have already won major concessions over when the new Basel III reform will be introduced after G20 leaders agreed last month it will be phased in over several years rather than implemented by the original end of 2012 deadline.
But the committee's statement on Friday underscored a determination that in return for a longer phase-in, regulators will resist calls from banks and some countries to heavily dilute some of the reform's main elements.
"The committee will present to the central bank governors and heads of supervision concrete recommendations for the definition of capital, the treatment of counterparty credit risk, the leverage ratio, the conservation buffer and the liquidity ratios," the committee said.
Banks are particularly keen for a new long-term liquidity funding element to be scrapped, while some countries like France and Germany want leverage caps to be implemented at the discretion of local supervisors rather than set in stone.
"No elements have been ditched," a person familiar with the Basel process said.
"With some elements which are new there will be an appropriate timeline to observe it in action and fine tune before implementing," the source said.
CONTINGENT CAPITAL
The Basel Committee agreed a two-pronged approach on the role of contingent or debt-like instruments in a bank's capital to absorb losses.
It signaled there will be a consultation shortly on the use of contingent capital on a "gone concern" basis.
"Gone concern" refers to ensuring contingent capital has loss-absorbing capacity when an ailing bank is at the point where it can no longer survive without being restructured.
There will be further talks about the use of contingent capital on a "going concern" basis at the end of the year with no proposals expected in the near term.
"Going concern" is emerging as a far more complex issue and refers to how easily such instruments convert into capital when a bank starts to face difficulties.
Several banks have already been topping up on such contingent capital.
The committee said it will keep reviewing specific proposals such as a capital surcharge on big, complex banking institutions that pose risks to the broader financial system, a sign there is no consensus yet on any final plan.
(Additional reporting by Katie Reid in Zurich and Marc Jones in Frankfurt, editing by Hugh Lawson)