Global Deal Reached on 'Basel III' Finance Reforms

Global financial regulators and central bank chiefs have reached a major agreement on the Basel III accord, which would impose new capital requirements on the world's banks in an effort to avert future financial meltdowns. Officials aim to spread the changes out over time to lessen the impact on bank profits, so as not to squelch the economic recovery.

"The agreement represents a significant step forward in reducing the incidence and severity of future financial crises, providing for a more stable banking system that is less prone to excessive risk-taking, and better able to absorb losses while continuing to perform its essential function of providing credit to creditworthy households and businesses," the U.S. Federal Reserve, FDIC and Office of the Comptroller of the Currency said in a joint statement.

"A Fundamental Strengthening"

The pact was reached at a meeting of central bank governors and officials from 27 countries led by European Central Bank President Jean-Claude Trichet. U.S. Federal Reserve Chairman Ben Bernanke (pictured) met with other officials at the Basel Committee on Banking Supervision in Switzerland Sunday. Bernanke was joined by New York Fed President William Dudley and Federal Deposit Insurance Corp. Chairman Sheila Bair.

The Basel Committee was created in 1974 by the central bank chiefs of the G10 group of powerful countries (now expanded to 20) in order to improve coordination among countries in a rapidly globalizing world economy. Basel III represents the ministers' attempt to update the accord to prevent another financial meltdown.

"The agreements reached today are a fundamental strengthening of global capital standards," European Central Bank President Jean-Claude Trichet said in a statement. "Their contribution to long-term financial stability and growth will be substantial. The transition arrangements will enable banks to meet the new standards while supporting the economic recovery."

Culmination of a Year's Work

"Banks will unarguably be safer institutions," Anders Kvist, head of Treasury at SEB, a bank based in Stockholm which has operations around Europe, toldThe New York Times.

Global regulators and bank chiefs have been working for a year to craft the new requirements, with the final pieces coming together this weekend, reports said. The main point of the reform is to prevent the world's biggest banks from taking on too much debt and becoming overleveraged, as many were before the collapse of the mortgage bubble. The agreement would require banks to have a safety cushion of capital to protect them from financial shocks.

Some bankers, including those representing Germany, have warned that Basel III would cut into their profits and push up the cost of credit for borrowers. Officials hope to spread the changes out over time to not harm bank performance, which could hamper the increasingly wobbly economic recovery.

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Agreement on the measure itself is noteworthy, given the number of countries and private interests involved. "It is a milestone," Kvist told The Times. "There will be more security in how to plan your balance sheet going forward and that's a very good thing."

Global finance officials generally praised the agreement. The British Bankers' Association said Basel III would improve the stability of the financial system but that urged the changes to take place over an extended period of time.

Reform, but How Fast?

"The transition though is the critical bit as the rules take money out of the economy," British Bankers' Association CEO Angela Knight said in a statement cited by Dow Jones Newswires. "Even though the U.K. banks are in a much stronger place than most on capital, the Basel changes need to be implemented over a long timetable and very carefully sequenced to avoid prolonging the downturn."

The finance officials agreed that banks would maintain a core "Tier 1" -- which refers to a bank's main reserves -- capital ratio of at least 6% of their risk-bearing assets, well higher than the 2% banks (4% including common stock) they had maintained prior to the financial meltdown. There would also be a 2.5% common equity buffer requirement.

While officials hope to spread implementation of the new rules out over time, banks will have less than five years to comply with the basic ratio requirements and 10 years to comply with the buffer requirements. The G20 nations are expected to ratify the Basel III agreement at its meeting in November.