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Leading central bank governors and banking regulators agreed on a new set of measures to strengthen supervision of the global banking system, the Basel, Switzerland-based Bank for International Settlements said Monday.
In a meeting held on Sunday, central bank leaders pledged to increase banks' capital requirements. The agreement sought to enhance the quality, consistency and transparency of the Tier 1 capital base, predominant of which must be common shares and retained earnings.
The group, which consists of 55 central banks, also decided to introduce a leverage ratio as a supplementary measure to the Basel II risk-based framework and a minimum global standard for funding liquidity.
Further, central bankers decided to form a framework for countercyclical capital buffers above the minimum requirement. The framework will include capital conservation measures such as constraints on capital distributions.
Central banks also agreed to issue recommendations to reduce the systemic risk associated with the resolution of cross-border banks.
The Basel Committee on Banking Supervision, whose oversight body held the Sunday meeting, is also assessing the need for a capital surcharge to mitigate the risk of systemic banks.
The measures should "substantially reduce the probability and severity of economic and financial stress," the BIS said in a statement.
The BIS meeting was preceded by the two-day G-20 London summit that concluded on Saturday. Finance ministers and central bank heads of the Group of 20 industrialized nations reiterated that the fiscal and monetary policy will continue to be "expansionary" for some more time to come in an effort to minimize or eliminate the chances of a double-dip recession. They agreed to put in place a "clawback" scheme which will ensure that bonuses paid to financial sector workers will be linked to the long-term success of the deals they make.
As part of the measures proposed by the G20 finance ministers, banks would be instructed to retain a larger part of their current profits to build capital, wherever needed, and to boost lending. Banks will also be required to hold more and better quality capital after ensuring that the economy is on track for recovery.
European Central Bank President Jean Claude-Trichet, who chairs the oversight body of the Committee, noted that, "The agreements reached today among 27 major countries of the world are essential as they set the new standards for banking regulation and supervision at the global level."
Nout Wellink, Chairman of the Basel Committee and President of the Netherlands Bank said, "We are working toward the introduction of a macroprudential overlay which includes a countercyclical capital buffer, as well as practical steps to address the risks arising from systemic, interconnected banks".
The Basel Committee will issue concrete proposals on these measures by the end of this year, the BIS said. It will carry out an impact assessment at the beginning of next year, with calibration of the new requirements to be completed by end-2010.
Appropriate implementation standards will be developed to ensure a phase-in of these new measures that does not impede the recovery of the real economy. Government injections will be exempt from new regulations.
"These measures will result over time in higher capital and liquidity requirements and less leverage in the banking system, less procyclicality, greater banking sector resilience to stress and strong incentives to ensure that compensation practices are properly aligned with long-term performance and prudent risk-taking," Wellink emphasized.
The London meeting of the G20 finance ministers was a preliminary to the G20 leaders' summit in Pittsburgh on September 24 and 25.
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