Bankers agree on new global capital rules

The regulators met at the Bank for International Settlements in Basel. Basel City Marketing

Top global banking regulators meeting in Basel have agreed on a sweeping overhaul of rules governing the amount of capital that financial institutions must hold.

The Basel Committee on Banking Supervision, considered the world’s regulator, said it had reached a consensus on the so-called Basel II rules for bank capital.

The aim is to increase the stability of the banking system, promote a level playing field in the banking sector and improve transparency.

Under the new rules, the amount of capital that a bank holds must be more in line with the risks it takes.

The agreement will be implemented on a staggered basis, starting at the end of 2006.

Banking “milestone”

Analyst Robert Motyka at Switzerland’s largest bank, UBS, described the agreement as a “milestone” for the international banking world that would have significant effects on the sector in the coming years.

Switzerland has opted for a “Swiss finish” in the accord, which means that Swiss capital adequacy ratios will be significantly above those of the international minimum standard.

These ratios are already considerably higher than the minimum required under the Basel I rules which date back to 1988.

Explaining the reason for this approach at the end of April, the Swiss Federal Banking Commission – the watchdog of the banking sector – said that a strong capital base was one of the mainstays of the Swiss banking system.

“Where capital adequacy is concerned, we are going beyond the international minimum standard because we are convinced of the need for our banking system to have a strong capital base,” argued director Daniel Zuberbühler.

“This is particularly important for the confidence of banking clients in the solvency of our banks, which in turn is a central prerequisite for our wealth management industry,” he added.

Cautious policy

Zuberbühler argued that this cautious policy had proved its worth during the domestic credit crisis in the 1990s when the banks incurred losses of some SFr60 billion ($46.27 billion), and equally during the three-year stock market slump which came to an end on March last year.

A study by economists at Credit Suisse last month said that the banks and the economy in Switzerland would not be seriously affected by the changes in Basel II.

It argued that most Swiss financial institutions had further developed their risk management processes over the past ten years and had therefore already covered most of the groundwork set out in Basel II.

The researchers also quashed fears that small and medium-sized enterprises (SMEs) would have greater difficulties in accessing capital, triggering a wave of bankruptcies.

They said smaller SME credits under Basel II would receive special treatment in comparison with other corporate credits.

swissinfo with agencies

Key facts

The central bank governors of the Group of Ten countries established the Basel Committee on Banking Supervision at the end of 1974.
The Committee’s Secretariat is provided by the Bank for International Settlements in Basel.
Talks on Basel II began in 1998.

In brief

Banking regulators have reached an agreement on new rules governing capital requirements in financial institutions.

The aim is to increase the stability of the banking system, promote a level playing field in the banking sector and increase transparency.

Known as Basel II, the accord will be implemented on a staggered basis from the end of 2006.

Swiss capital adequacy ratios will be significantly above those of the international minimum standard.