BRUSSELS/LONDON - European Union ministers and regulators sought Tuesday to minimize boom-and bust economic cycles by agreeing to make capital rules more flexible and ensuring banks have enough cash to ride out a crisis.
Policymakers across the world are applying lessons to avoid the need for future government-backed bailouts by ensuring banks are equipped to stand on their own feet in a crisis.
Under the agreed plan on long-term rules, which the EU's executive European Commission will use to draft legislation in October, banks would be required to build higher capital buffers in good times so that they can be reduced during downturns.
This would help prevent financial institutions lending too much money when economic growth is high and allow them to provide more loans when times are bad, reassuring investors.
We need to see stronger buffers in banks in good times. It is important that we mend the banking system so that credit gets running again. We need stronger regulation, more efficient regulation, said Swedish Finance Minister Anders Borg, whose country holds the EU's presidency.
This so-called provisioning is among the pledges agreed by the G20 group of countries in April and already promised by the European Commission.
The aim of the measures is to limit the extent to which financial rules amplify cyclical booms and busts. Britain is set to unveil is own proposals Wednesday but the idea of using capital rules to reduce fluctuations has met with scepticism.
Countercyclical capital requirements is one of those apparently good ideas that doesn't really stand up to scrutiny, said Simon Gleeson, a financial lawyer at Clifford Chance.
ONE MONTH SURVIVAL PERIOD?
The G20 has also pledged to force banks to hold more cash reserves to weather abrupt changes such as the drying up of credit seen in the financial crisis, which was triggered by bad loans in the United States and spread through the world economy.
A committee of national banking supervisors from the 27-nation EU published draft guidelines Tuesday that will lead to banks significantly increase their cash holdings.
The Committee of European Banking Supervisors said the exact amounts would be determined for each bank based on a series of tests laid out by regulator.
A survival period of at least one month should be applied to determine the overall size of the liquidity buffer under the chosen stress scenarios, CEBS said.
Within this period, a shorter time horizon of at least one week should also be considered to reflect the need for a higher degree of confidence over the very short term.
Critics say extra bank capital, provisioning and liquidity requirements could set back economic recovery as the sector will have less money to lend, but policymakers say the new rules would be introduced over time as markets recover their poise.
A call by Germany to temporarily relax globally-agreed Basel II rules on capital requirements for banks to help boost lending and accelerate the recovery from the worst economic crisis since World War Two, failed to garner broad support.
What I'm not in favour of is that some -- not Germany -- are thinking about chucking out Basel II. A crisis that arose on the back of debts can't be solved by making it easier to run up debts, Austrian Finance Minister Josef Proell said.
The Commission plans to look at the issue and report back to the ministers but German Finance Minister Peer Steinbrueck said his country would press on with it plans.
Led by Steinbrueck and French Economy Minister Christine Lagarde, the ministers also increased pressure on the International Accounting Standards Board to alter accounting standards to let U.S. and European banks compete evenly.
The ministers want changes to a rule that forces banks to value impaired assets at depressed prices. This has caused writedowns that have unnerved investors and put pressure on banks to find new capital just as credit gets harder to secure.
The IASB has already agreed to speed up reforms so that key changes requested by EU ministers take effect by year end, in time for inclusion in 2009 annual reports.
We must encourage the IASB to make the proposals not at the end of the year, but in the autumn, Steinbrueck said.
Accountants say moving any faster risks mistakes and that tweaking the rules won't make bad assets disappear.
There is at present no credible evidence to support the view that the accounting rules contributed to the financial crisis, said Iain Coke, head of financial services at the Institute of Chartered Accountants in England and Wales.
(Writing by Huw Jones, editing by Lin Noueihed)