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Regulators Propose Strict Capital Rules

The new rules proposed by the Basel Committee on Banking Supervision will introduce stricter limits on what counts as top-level assets and on risk exposure from trading in derivatives and securities.

Basel committee chairman Nout Wellink said the proposals, released on Thursday, would result in more resilient banks and a sounder banking and financial system.

“They will promote a better balance between financial innovation and sustainable growth,” he said.

The announcement contained little detail on the size of a planned global leverage ratio which would limit banks’ ability to lend but the committee said the new standards would probably take effect by the end of 2012. It said there would be a grace period for transition.

“The fully calibrated set of standards will be developed by the end of 2010 to be phased in as financial conditions improve and the economic recovery is assured, with the aim of implementation by end-2012,” the committee said in a statement.

“The Committee will put in place appropriate phase-in measures and grandfathering arrangements for a sufficiently long period to ensure a smooth transition to the new standards.”

Under the plan, the “predominant” form of top-quality tier one capital must be common shares and retained earnings and limits will apply to other qualifying assets.

Current rules allowing hybrid or debt-like capital to make up 15 per cent of tier one assets will be phased out. The United States had wanted to keep hybrid capital as part of core capital, while Europeans believed it should only be common equity.