Banking supervisors published draft rules on Friday that will force banks around the world to build up extra capital in a boom, but gave no hint of what level of funds lenders would be required to hold.
The global committee said it was on track to deliver a complete package of capital and liquidity reforms in time for the November 2010 summit of G20 leaders in Seoul.
Banks would be asked to build up a buffer of capital when national authorities judge that there is excess credit growth together with a build-up of system-wide risk, the Swiss-based Basel Committee said.
This will help ensure the banking system has an adequate buffer of capital to protect it against future potential losses, it said in a statement.
Spain introduced such buffers after an earlier crisis, and the way its top lenders withstood the current global crisis prompted the Group of 20 leading economies to follow suit.
The buffer plan will be finalized by the end of the year and will form part of the main Basel III package, rather than be implemented separately. Banks had hoped for a delay in the countercyclical buffer plans.
The buffer will normally be set at zero but if a credit boom starts, banks would have to begin hoarding extra cash in case the upswing turns sour and hobbles the sector.
The announcement dashed market hopes for some hints on what the new, higher levels of capital will be in the final package, leaving uncertainty hanging over bank stocks.
Banks would be given a year to build their capital buffers to the required level before restrictions are slapped on dividends and other distributions of earnings.
NO ELEMENTS DITCHED
The Basel Committee, made up of central bankers and supervisors from the G20 and other countries, spent Wednesday and Thursday pulling together the reforms, aimed at ensuring banks can withstand any future shocks without taxpayer aid.
A fleshed-out package will be presented to the committee's oversight body later this month for endorsement.
Banks have already won major concessions when G20 leaders agreed last month that Basel III reforms will be phased in over several years rather than implemented by the original end of 2012 deadline.
Guido Ravoet, secretary general of the European Banking Federation, urged that only proposals that have been fully assessed and are considered mature should be put forward to the G20 approval at its November meeting in Seoul.
But the committee's statement on Friday underscored a determination that in return for a longer phase-in, regulators will resist calls from banks and some countries to heavily dilute some of the reform's main elements.
Banks are particularly keen for a new long-term liquidity funding element to be scrapped, while some countries like France and Germany want leverage caps to be implemented at the discretion of local supervisors.
No elements have been ditched, a person familiar with the Basel process said.
With some elements which are new there will be an appropriate timeline to observe it in action and fine tune before implementing, the source said.
The Basel Committee agreed a two-pronged approach on the role of contingent or debt-like instruments in a bank's capital to absorb losses.
It signaled there will be a consultation shortly on ensuring that contingent capital has loss-absorbing capacity when an ailing bank is at the point where it can no longer survive without being restructured.
There will be further talks at the end of the year about the use of contingent capital on a going concern basis -- a far more complex issue, concerning how easily such instruments convert into capital when a bank starts to face difficulties.
The committee said it will keep reviewing specific proposals such as a capital surcharge on big, complex banking institutions that pose risks to the broader financial system, a sign there is no consensus yet on any final plan.
(Additional reporting by Katie Reid in Zurich and Marc Jones in Frankfurt, editing by Hugh Lawson/Ruth Pitchford)