Bank Regulators Reach Deal on New Capital Rules

 

By DAMIAN PALETTA and DAVID ENRICH

 

Bank regulators from around the globe reached an agreement Sunday on new rules for the world’s largest banks in an effort to create a more stable financial system.

 

The deal creates new capital standards for banks, a move designed to prevent the companies from loading up on the risk and debt that many saw as a precursor to the recent financial crisis.

 

The new rules will force banks to hold more capital against a wider range of their loans and investments. It will likely push down profits at the world’s largest banks, many of which have warned such a move could drive up the cost of credit for borrowers and restrict credit.

 

Details of the final agreement were being released Sunday afternoon by the Bank for International Settlements in Basel, Switzerland, where the global regulators were meeting.

 

Heading into the weekend before the pact, the discussions were focusing on requiring banks to hold basic levels of capital known as “common equity” equal to at least 7% of the bank’s assets. This would be up from a 4% threshold imposed on U.S. banks after the 2009 stress tests.

 

The 7% component is expected to include a 2.5% “conservation” buffer of capital. If capital levels at a bank dipped below this buffer it could face tighter restrictions on its dividend and executive compensation policies.

 

Regulators have tried to address some of the concerns about the new rules’ impact on economic growth, cognizant of the fragile state of many economies. Regulators are expected, for example, to allow banks to phase the new rules in over multiple years.

 

But regulators have said the new rules are necessary to ensure the interconnected global banking system doesn’t face another crisis such as that which led to taxpayer funded bailouts in 2008 and 2009.

 

The deal was brokered through discussions by the Basel Committee on Banking Supervision, a consortium of regulators and central bankers that meets in Switzerland. Top officials from around the world, including Federal Reserve Chairman Ben Bernanke, were at the meeting to sign off on the final compromise.

 

World leaders are expected to ratify the deal reached Sunday at a meeting of the Group of 20 leading nations in South Korea this November. Then each of the 27 countries participating in the Basel process would adapt the rules to their individual banks.

 

For banks, the new rules will require the banks to shrink their balance sheets and dump business lines deemed too risky. They’ll have to keep in reserve more earnings to protect against potential losses, which will leave them less money for investors and employees.

 

For consumers, the rules could cut both ways—potentially driving up the rates they receive on deposits but also raising the cost of loans and crimping their availability. “Everybody is going to feel the impact a little bit differently, but everyone is definitely going to feel the impact,” said Mary Frances Monroe, vice president of regulatory policy at the American Bankers Association trade group.

 

The rules’ impact won’t be spread evenly across global banking. In some countries, such as the U.S., Canada and the U.K., banks have raised significant amounts of new capital—funds that reduce their debt level, and hence pare back risk —and are sitting on thicker cushions than counterparts elsewhere.

 

Some big European banks might have to augment their capital. Analysts at Morgan Stanley Thursday pointed to Germany’s Deutsche Bank AG, Allied Irish Banks PLC, Bank of Ireland PLC and Austria’s Erste Group Bank AG as potentially finding themselves short of capital under the new Basel rules.

 

Top Citigroup Inc. executives told Wall Street investors last week the new rules could prevent the company from paying dividends to investors until at least the end of 2011, and they “exhibited a great deal of uncertainty around the impact” of the new rules, according to a report by Sanford C. Bernstein & Co. analyst John McDonald.

 

Bank of America Corp. and PNC Financial Services Group Inc. could be forced to sell their ownership stake in giant asset-management firm BlackRock Inc. Deutsche Bank is working on plans to raise more than $10 billion in capital, in part to meet the new requirements, and one analyst predicted Basel 3 could force Morgan Stanley to raise $1.5 billion in capital.

 

Many other banks could take similar steps to meet government mandates. On Friday, Allied Irish Banks sold its Polish operations to Banco Santander SA in a €2.94 billion deal that was mandated by European regulators because the Irish lender had received state aid.

 

Bank of America, PNC, Citigroup, Morgan Stanley, Deutsche Bank and Allied Irish Banks declined to comment. Michael Mauritz, an Erste spokesman, said “we feel pretty comfortable” with the bank’s capital ratios, but he added that “nobody really knows what Basel will bring.” Bank of Ireland spokesman Dan Loughrey said his company currently exceeds the capital requirements set by Irish regulators.

 

Write to Damian Paletta at damian.paletta@wsj.com  and David Enrich at david.enrich@wsj.com

Source: Proshare