Business
Global bankers meet to agree new capital reserve rules
  • | BBC | September 12, 2010 09:55 PM

Central bank governors and senior regulators are meeting in the Swiss city of Basle to agree a deal requiring banks to hold more capital in reserve.

The Bank of Japan headquarters pictured in Tokyo.

At present the "tier one capital ratio" is 4%. The ratio is a measure of banks\' cushion against future losses.

BBC business editor Robert Peston says in future it will be at least 7%.

The meeting at the Bank for International Settlements is a major part of the global financial reforms after the global economic downturn.

Ratification

The new figure is designed to protect the world\'s banks in future downturns.

Low levels of capital relative to assets were a major factor in the recent global financial crisis.

Any agreement will still need to be ratified by the heads of government of the G20 group of nations at their summit in November.

The tier one capital ratio is made up of equity - its shares - and retained earnings. If a bank makes losses on loans, it is the shareholders who take this loss.

However, once all of a bank\'s equity is eaten up by losses, the bank becomes insolvent - in other words its assets are no longer worth enough to repay all of its debts.

The new requirement should prove little problem for UK banks, as it is in fact lower than the 8-9% ratio currently held by them.

It is also well below the 10% level that was being pushed for by the UK, the US and Switzerland.

The updated rules will mean some banks will need to raise a lot more money from shareholders.

The rules may have the effect of limiting lending, at least in the short term, as most banks - particularly those in Europe - have too little capital for the loans they have already made.

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