Banks are to get more time to implement new capital rules and some proposals will be eased to ensure the industry can adjust to the new standards, a top central banker and regulator said, lifting the sector on Friday.
We will ensure the banking sector can move to the new standards through earnings retention and reasonable capital raising, said Nout Wellink, chairman of the Basel Committee and a member of the European Central Bank.
Where there are trade-offs, these should go in the direction of giving banks the time to reach the new standards instead of watering down the standards themselves, he said at a meeting of the Institute of International Finance (IIF), a bank lobby group.
Banks had asked for more time to implement the new capital and liquidity rules, dubbed Basel III, and the DJ Stoxx European banking index was up 2.2 percent at 1120 GMT, outpacing the broader market.
Wellink said certain draft proposals needed to be toned down, referring to a set of deductions and exclusions from common equity to calculate capital needs.
We do realize, on the basis of quoted impact studies, that we have to compromise on certain elements ... but I think we will find a very acceptable solution, he said.
He did not say where changes could be made. Banks have said the way the Basel Committee proposed to change rules on how minority shareholdings count toward capital calculations and the treatment of deferred taxes were among issues they would like watered down.
Wellink said banks entered the financial crisis with too much leverage, inadequate liquidity buffers, weak risk management and inappropriate pay structures, and had been too profitable in the past.
New rules would raise the resilience of the system, but banks faced a difficult period and could be doing more, he said, adding: Many banks have returned to profitability but have not done enough to rebuild their capital buffers to support new lending activity.
Basel III rules are due to be implemented by the end of 2012, but banks say that is unrealistic and G20 finance ministers admit changes are likely to be phased in over a longer time than originally planned.
UBS chief executive Oswald Gruebel said the need for so many countries to agree was hindering progress.
There are a lot of things happening in an uncoordinated fashion. Often proposed by people with not enough knowledge of the markets, Gruebel said on the sidelines of the IIF meeting.
The IIF, which represents over 400 firms, said on Thursday that holding more capital and other new regulation could cut 3 percent off economic growth in the United States, the euro zone and Japan in the next five years.
Deutsche Bank chief executive Josef Ackermann, who also chairs the IIF, said regulators should prevent regulatory arbitrage across financial centers by coordinating tougher capital rules for investment bank trading books.
The implementation of Basel III trading book proposals should be simultaneous, symmetrical, and comparable across all major financial markets, he said.
Among regulatory reform proposals in the pipeline are rules to force investment banks to back risky bets with more capital as a way to deter the bets that triggered the credit crunch.
They are due to come into force in January, but are widely expected to be delayed. Banks support the move to hold more capital for riskier assets, but want them to take effect in the United States and Europe at the same time.
Regulators expect the amount of capital held against a trading book to be multiples of current requirements. The Basel Committee has estimated that trading book capital will be two to three times higher under the new rules, a shift analysts say will prompt a rethink by some banks as to whether they want to continue trading certain complex or risky assets.
(Additional reporting by Edward Taylor; Editing by Boris Groendahl and Dan Lalor)