The biggest banks in the world that pose the biggest risks to the global financial system will eventually hold 2.5% more capital on balance sheets to protect them, and thus the larger financial world, should another cataclysmic meltdown occur like the one in 2008.
The Bank of International Settlements (BIS), which serves as over overseeing organization for the largest, global central banks, has pushed for the initiative for higher bank capital standards as a uniform action around the world to calm markets in the wake of questions about Greece's solvency and in reaction to what happened globally in 2008.
The BIS released details of the agreement on Saturday following negotitiations within an organization committee. The agreement will now be presented to the Financial Stability Board, which will make needed tweaks and changes to the final document next month before its put into place.
Global bank regulators have been working on the agreement for months. U.S. regulators wanted the buffer increased by as much as 3% but most European regulators were pushing back earlier this month during meetings in Frankfort for a smaller amount, no greater than 2%. The agreement for the 2.5% was the middle point between the differing sides. In pushing for the 2.5% U.S. regulators argued that should another crisis occur only common equity will allow a financial institution to survive.
According to the agreement, which came out of the Basil III committee, banks which pose risks to the world financial situation through scope will face a rising scale that will determine exactly how much more capital they must hold. The requirements will range between 1% for the smaller banks that are nonetheless large enough to impact the global financial situation, and 2.5 percent for the biggest banks which pose the greatest risks.
Already the largest banks have a 7% common equity agreement in place for holding capital according to BIS terms, so for them this new agreement constitutes an increase of more almost 35 percent more than what they have been previously held to. The BIS committee charged with the agreement said in a statement to provide a disincentive for banks facing the highest charge to increase materially their global systematic importance in the future, an additional 1% surcharge would be applied to such circumstances.
Banks will have until 2019 to meet the new capital standards, however.