New BASEL III Rules published
On 12 September 2010 an agreement on the so called “Basel III” rules was published. Basel III represents a comprehensive reform of global banking regulation which will require banks to hold more capital in reserve in order to make a repetition of the liquidity crunch of the international banks more unlikely.
Should these rules be finally adopted, banks would be required to hold a minimum of 7% of Tier 1 capital in reserve, which is substantially more than the current 2%. Under the new rules, the minimum common equity requirement will increase to 4.5%. Banks will also be required to hold a separate “capital conservation buffer” to withstand periods of stress, amounting to 2.5% of common equity. Banks will be allowed to draw upon the buffer during periods of stress but, should they do so, they will face constraints on dividends and bonuses.
Banks have been given longer than expected to comply with the new rules. The 4.5% common equity requirement will be phased in by 1 January 2015, while the capital conservation buffer will be phased in from 1 January 2016 and will become fully effective on 1 January 2019.
The Basel Committee and Financial Stability Board continue to work together on an integrated approach to systemically important financial institutions, which will be required to hold capital in excess of the minimum levels announced on September 12, 2010.