Global regulators announced new capital rules that weren't as harsh as some had expected. Sentiment toward lenders also improved as the rules, which won't be introduced for years, took away a key element of uncertainty by easing any immediate pressure on banks to sell new shares to raise capital.
On Sunday, global regulators agreed to new capital rules for the sector. The new regulations will require a total common equity ratio of 7% for banks.
The minimum common equity level requirement was lifted to 4.5%, from 2%, and banks will also now be required to hold a capital conservation buffer of 2.5% "to withstand future periods of stress," the group of governors and supervisory heads in the Basel Committee on Banking Supervision announced.
The new rules requiring higher capital levels for lenders are designed to provide a cushion to absorb losses and thus help prevent the kind of problems seen in the recent global financial crisis.
Banks will be required to have a tier 1 capital ratio of 6%, up from the current 4% level. The key element of tier 1 capital is common shareholder funds and disclosed reserves or retained earnings, according to the Basel Committee.
Although the sector's capital requirements have increased, the rise wasn't as bad as some had expected and banks will have time to introduce the new rules, with higher capital levels required to be in place by the start of 2019.
Banks have to reach the minimum tier-1 ratio level of 4.5% by 2015 while the capital conservation buffer has to be fully in place by Jan. 1, 2018.
Most banks across the rest of Asia already have capital levels well above the minimum levels set.
This contrasts with Europe where the new rules are likely to cause more pain. Top German lender Deutsche Bank is seeking a headstart on its rivals by announcing plans to raise almost 10 billion euros to bolster its capital, and more banks in Germany, Spain, France, Japan and elsewhere are likely to follow suit to meet the new standards.
The Basel III agreement was reached in Switzerland by central bank governors and top supervisors from 27 countries, after a year of horse-trading and lobbying that involved banks and governments seeking to protect their national interests.
Along with the capital standards, Basel III includes a range of reforms agreed earlier this year to reduce risk-taking by banks, including rules on how liquid banks' assets must be and how banks must treat tax assets on their books. Some changes were watered down in July after strenuous lobbying by banks.
Still, the new capital regulations which will be presented to the Group of 20 leaders summit in November for approval, remove a key area of investor uncertainty on the sector overall.
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