Basel Announces Comprehensive Response to Financial Crisis

To strengthen regulation of the banking sector, the Group of Central Bank Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, has announced key measures and principles designed to reduce economic and financial stress in the future.

 

Nout Wellink, Chairman of the Basel Committee and President of the Netherlands Bank, states that the committee is “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 key measures to strengthen the regulation of the banking sector are:

 

1. Raise the quality, consistency and transparency of the Tier 1 capital base. The predominant form of Tier 1 capital must be common shares and retained earnings. Appropriate principles will be developed for non-joint stock companies to ensure they hold comparable levels of high quality Tier 1 capital. Furthermore, deductions and prudential filters will be harmonised internationally and generally applied at the level of common equity or its equivalent in the case of non-joint stock companies. Finally, all components of the capital base will be fully disclosed.

 

2. Introduce a leverage ratio as a supplementary measure to the Basel II risk-based framework with a view to migrating to a Pillar 1 treatment based on appropriate review and calibration. To ensure comparability, the details of the leverage ratio will be harmonised internationally, fully adjusting for differences in accounting.

 

3. Introduce a minimum global standard for funding liquidity that includes a stressed liquidity coverage ratio requirement, underpinned by a longer-term structural liquidity ratio.

 

4. Introduce a framework for countercyclical capital buffers above the minimum requirement. The framework will include capital conservation measures such as constraints on capital distributions. The Basel Committee will review an appropriate set of indicators, such as earnings and credit-based variables, as a way to condition the build up and release of capital buffers. In addition, the Committee will promote more forward-looking provisions based on expected losses. 

 

5. Issue recommendations to reduce the systemic risk associated with the resolution of cross-border banks. The committee will also assess the need for a capital surcharge to mitigate the risk of systemic banks.

 

Concrete proposals on these measures will be issued by the Basel Committee by the end of this year. The Committee says 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.

 

According to the Basel Committee, the measures will be implemented according to appropriate standards so that they do not impede the economy’s recovery.

 

Meanwhile, to guide supervisors in the transition to a higher level and quality of capital in the banking system, the body endorses the following principles:

 

1. Building on the framework for countercyclical capital buffers, supervisors should require banks to strengthen their capital base through a combination of capital conservation measures, including actions to limit excessive dividend payments, share buybacks and compensation.

 

2. Compensation should be aligned with prudent risk-taking and long-term, sustainable performance, building on the Financial Stability Board (FSB) sound compensation principles.

 

3. Banks will be required to move expeditiously to raise the level and quality of capital to the new standards, but in a manner that promotes stability of national banking systems and the broader economy.

 

4. Supervisors will ensure that the capital plans for the banks in their jurisdiction are consistent with these principles.

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