Basel, Switzerland (GenevaLunch) – More stringent rules for banks, designed to strengthen individual institutions as well as the financial system as a whole, are recommended by the Basel Committee on Banking Supervision in its latest consultative proposals published 17 December. Banks will need to increase their capital base, introduce more stringent risk controls and limit much unsecured business if proposed new rules are adopted in three years. The proposals suggest:

• Banks’ capital bases should have improved transparency, quality and consistency so that large, internationally active banks are better able to absorb losses.
• Capital requirements for exposure to derivatives, repos and securities financing should be strengthened. Currently many of these activities are conducted over the counter, or tailor-made between banks. The proposed new capital requirements would increase the tendency for this kind of trading to become standardized, using exchanges and central counterparties.
• A leverage ratio should be added to the Basel 2 risk-based framework. This will reduce the possibility of an excessive build-up of leverage in the banking system. The leverage ratio will apply internationally, taking into account differences in accounting systems.
• Capital buffers should be built up in good times, which can be drawn upon in periods of difficulty. This counter-cyclical capital framework is designed to dampen shocks to the financial system, rather than amplifiy them.
• Internationally active banks should have a global minimum liquidity requirement, including a 30-day liquidity coverage and a gradual longer-term structural liquidity.

Many of the proposals arise from lessons learned from the global financial meltdown of 2008 and 2009. “The reforms strengthen bank-level, or micro-prudential, regulation, which will help raise the resilience of individual banking institutions to periods of stress. The reforms also have a macro-prudential focus, addressing system wide risks that can build up across the banking sector as well as the pro-cyclical amplification of these risks over time”, the Committee notes in its report.

Background: GenevaLunch

Links to other sites: Basel Committee’s international framework, MarketWatch

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