Banking reforms: Higher capital reserves for ‘too big to fail’ banks
27 Jun 2011
After nearly two years of deliberations, a panel of global regulators said Saturday that banks deemed 'too big to fail' would have to make additional provisions for capital reserves. The recommendation comes even as regulators and political administrations struggle to avoid a repeat of the 2008 financial crisis when banks and financial institutions deemed 'too big to fail' triggered a collapse in the global financial system.
In an initial set of recommendations, the chief oversight group of the Basel Committee on Banking Supervision proposed that the world's largest and most complex banks will have to provide a reserve of high-quality capital of between 1 and 2.5 per cent of their assets to cope with emergencies, which would be over and above the existing minimum capital levels for all banks, currently set at 7 per cent of assets.
Regulators have decided to impose the surcharge on the basis of a sliding scale, which will factor in several matters, including the bank's size, complexity and the extent of its financial transactions around the world.
Possibly, in a recognition that it was rampant financial jugglery that caused the 2008 crash, regulators will press for even higher capital requirements for banks, with the committee proposing an additional surcharge on banks that increase in size, or engage in risky activities that would ''increase materially'' the threat they pose to the financial system.
The surcharge could raise capital reserve levels to 3.5 per cent of assets.
These are interim recommendations and the Basel committee is due to issue detailed proposals in late July, which will allow banks and policymakers to weigh on with their recommendations and observations the new rules are accorded formal approval.
