The Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, has introduced a rigorous capital and liquidity reform package that is aimed to promote the long term stability of the banking system.
The group reached a broad agreement on areas including the definition of capital, the treatment of counterparty credit risk, the leverage ratio, and the global liquidity standard.
In a statement, the Basel committee, which represents central banks and regulators in 27 nations and sets capital standards for banks worldwide, agreed to allow certain assets, including minority stakes in other financial firms, to count as capital.
The committee also set a leverage ratio to apply to banks globally for the first time, reports Bloomberg. The committee initially set the ratio at 3% and will be tested from 2013 until 2017.
Under the new rules, banks are allowed to count part of a stake it owns in another financial firm in relation to the risk the capital is supposed to cover at the entity in which it invested. Deferred tax assets and mortgage- servicing rights would be included in capital up to a limit. The total for all three could not exceed 15% of a lender’s common equity, notes Bloomberg.
Bankers interviewed by Bloomberg are worried that the new rules may force banks to reduce lending, potentially limiting economic growth.