BASEL, Switzerland (MNI) – Following is the first half of the full
text of the press statement issued Sunday by the Group of Governors and
Heads of Supervision to announce higher global minimum capital
standards. The text can be viewed at http://bis.org/press/p100912.htm,
where tables detailing the phase-in arrangement and other aspects of the
new standards are also available.

“At its 12 September 2010 meeting, the Group of Governors and Heads
of Supervision, the oversight body of the Basel Committee on Banking
Supervision, announced a substantial strengthening of existing capital
requirements and fully endorsed the agreements it reached on 26 July
2010. 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.

The Committee’s package of reforms will increase the minimum common
equity requirement from 2% to 4.5%. 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%.
This reinforces the stronger definition of capital agreed by Governors
and Heads of Supervision in July and the higher capital requirements for
trading, derivative and securitisation activities to be introduced at
the end of 2011.

Mr Jean-Claude Trichet, President of the European Central Bank and
Chairman of the Group of Governors and Heads of Supervision, said that
‘the agreements reached today are a fundamental strengthening of global
capital standards.’ He added that ‘their contribution to long term
financial stability and growth will be substantial. The transition
arrangements will enable banks to meet the new standards while
supporting the economic recovery.’ Mr Nout Wellink, Chairman of the
Basel Committee on Banking Supervision and President of the Netherlands
Bank, added that ‘the combination of a much stronger definition of
capital, higher minimum requirements and the introduction of new capital
buffers will ensure that banks are better able to withstand periods of
economic and financial stress, therefore supporting economic growth.’

Increased capital requirements

Under the agreements reached today, the minimum requirement for
common equity, the highest form of loss absorbing capital, will be
raised from the current 2% level, before the application of regulatory
adjustments, to 4.5% after the application of stricter adjustments. This
will be phased in by 1 January 2015. 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. (Annex 1 summarises the new capital requirements.)

The Group of Governors and Heads of Supervision also agreed that
the capital conservation buffer above the regulatory minimum requirement
be calibrated at 2.5% and be met with common equity, after the
application of deductions. The purpose of the conservation buffer is to
ensure that banks maintain a buffer of capital that can be used to
absorb losses during periods of financial and economic stress. While
banks are allowed to draw on the buffer during such periods of stress,
the closer their regulatory capital ratios approach the minimum
requirement, the greater the constraints on earnings distributions. This
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.

A countercyclical buffer within a range of 0% – 2.5% of common
equity or other fully loss absorbing capital will be implemented
according to national circumstances. The purpose of the countercyclical
buffer is to achieve the broader macroprudential goal of protecting the
banking sector from periods of excess aggregate credit growth. For any
given country, this buffer will only be in effect when there is excess
credit growth that is resulting in a system wide build up of risk. The
countercyclical buffer, when in effect, would be introduced as an
extension of the conservation buffer range.

These capital requirements are supplemented by a non-risk-based
leverage ratio that will serve as a backstop to the risk-based measures
described above. In July, Governors and Heads of Supervision agreed to
test a minimum Tier 1 leverage ratio of 3% during the parallel run
period. Based on the results of the parallel run period, any final
adjustments would be carried out in the first half of 2017 with a view
to migrating to a Pillar 1 treatment on 1 January 2018 based on
appropriate review and calibration.

Systemically important banks should have 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.
The Basel Committee and the FSB are developing a well integrated
approach to systemically important financial institutions which could
include combinations of capital surcharges, contingent capital and
bail-in debt. In addition, work is continuing to strengthen resolution
regimes. The Basel Committee also recently issued a consultative
document Proposal to ensure the loss absorbency of regulatory capital at
the point of non-viability. Governors and Heads of Supervision endorse
the aim to strengthen the loss absorbency of non-common Tier 1 and Tier
2 capital instruments.

Transition arrangements

Since the onset of the crisis, banks have already undertaken
substantial efforts to raise their capital levels. However, preliminary
results of the Committee’s comprehensive quantitative impact study show
that as of the end of 2009, large banks will need, in the aggregate, a
significant amount of additional capital to meet these new requirements.
Smaller banks, which are particularly important for lending to the SME
sector, for the most part already meet these higher standards.”

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