13 September 2010

BCBS announces a substantial strengthening of existing capital requirements

The Board of Governors and Heads of Supervision of the Basel Committee on Banking Supervision has announced a package of reforms that will increase the minimum requirement for the highest form of loss absorbing capital - common equity requirement from 2% to 4.5% by 1 January 2015. In addition, banks will be required to hold a capital conservation buffer of 2.5% to withstand future periods of stress bringing the total common equity requirements to 7%. The Tier 1 capital requirement, which includes common equity and other qualifying financial instruments based on stricter criteria, will increase from 4% to 6% over the same period.

The purpose of the conservation buffer is to ensure that banks maintain a countercyclical buffer of capital within a range of 0% - 2.5%, that can be used to absorb losses during periods of financial and economic stress. These capital requirements are supplemented by a non-risk-based Tier 1 leverage ratio of 3% that will serve as a backstop to the risk-based measures described above.

Systemically important banks should have a loss-absorbing capacity beyond the standards announced today and work continues on this issue in the Financial Stability Board and relevant Basel Committee work streams, but this new framework will reinforce the objective of sound supervision and bank governance and address the collective action problem that has prevented some banks from curtailing distributions such as discretionary bonuses and high dividends, even in the face of deteriorating capital positions.

  On the transitional front, national implementation by member countries will begin on 1 January 2013. The minimum common equity and Tier 1 requirements will be phased in between 1 January 2013 and 1 January 2015, the regulatory adjustments will begin at 20% and will be fully implemented by 1 January 2018 and the capital conservation buffer will be fully phased in by the 1st of January 2019.

  These capital reforms, together with the introduction of a global liquidity standard, deliver on the core of the global financial reform agenda and will be presented to the Seoul G20 Leaders Summit in November.

© BIS - Bank for International Settlements