Our Terms of Service and Privacy Policy have changed.

By continuing to use this site, you are agreeing to the new Privacy Policy and Terms of Service.

New bank rules to curb risk

basel.gi.top.jpgThe so-called Basel Committee meeting in Switzerland issued new rules governing bank risk. By CNNMoney staff


NEW YORK (CNNMoney.com) -- Global officials meeting in Switzerland Sunday announced new guidelines to strengthen the financial system by forcing banks to set aside more capital.

The goal is ensure that banks have bigger reserve cushions when things go bad and avoid another bank meltdown like the panic of 2008, which led to widespread credit gridlock and fueled the recession.

At the same time, the rules attempt to walk a delicate balance: Forcing banks to stash too much too soon in "rainy day funds" could crimp their ability to lend -- at a time when global credit has already contracted dramatically.

The effort was led by the Basel Committee on Banking Supervision, which is made up of officials from 27 countries including the United States. Federal Reserve Chairman Ben Bernanke and Federal Deposit Insurance Corp. Chairman Sheila Bair were among attendees from the U.S. government.

U.S. regulators said Sunday that the new guidelines would make the banking system more stable by curbing risk.

"The agreement represents a significant step forward in reducing the incidence and severity of future financial crises," the Fed, FDIC and Office of the Comptroller of the Currency said in a joint statement.

The new rules, known as Basel III, will be enforced by local bank watchdogs like the Fed and FDIC and will take effect over a period of years after being adopted by each country.

The reforms will increase the minimum core capital cushion -- the funds banks accumulate by selling stock and retaining profits -- to 4.5% of assets from the current 2%. In addition, banks will have to set aside another 2.5% for "future periods of stress."

"The agreements reached today are a fundamental strengthening of global capital standards," said Jean-Claude Trichet, president of the European Central Bank.

Phase-in period: Under the agreement, the United States and other nations would be required to start implementing the new standards on Jan. 1, 2013. The stricter capital requirements would be phased in over two years to avoid putting too much stress on banks.

The phase-in will reduce "the potential for ... short-term pressures on the cost and availability of credit to households and businesses," U.S. regulators said.

Basel III, which will apply everywhere, was the subject of intense lobbying. Big banks in Japan and Europe, which tend to be less robustly capitalized than those in the United States and the United Kingdom, were particularly aggressive.

Shares of European banks tumbled last week as investors worried about the impact of the new requirements. But the new rules may not have an immediate impact on the likes of Bank of America (BAC, Fortune 500) and JPMorgan Chase (JPM, Fortune 500), which have amassed significant capital over the last few years and boosted profits.

The policies were developed based on lessons from the financial crisis in 2008. As the bubble in home prices burst, banks suffered billions of dollars in losses on mortgage-related assets. Those losses proved fatal for some banks, namely Lehman Brothers, when liquidity dried up and investors panicked.

Earlier this year, President Obama signed a far-reaching Wall Street reform bill that gives regulators more clout to come down hard on banks they think are engaging in overly risky lending.

- Fortune's Colin Barr and CNNMoney's Ben Rooney contributed to this report. To top of page

Search for Jobs

Index Last Change % Change
Dow 19,756.85 142.04 0.72%
Nasdaq 5,444.50 27.14 0.50%
S&P 500 2,259.53 13.34 0.59%
Treasuries 2.46 0.08 3.23%
Data as of 1:17am ET
Company Price Change % Change
Bank of America Corp... 23.09 0.14 0.61%
Ford Motor Co 13.17 0.14 1.07%
Chesapeake Energy Co... 7.72 0.12 1.58%
Twenty-First Century... 28.21 -0.43 -1.50%
Apple Inc 113.95 1.83 1.63%
Data as of Dec 9
Sponsors

Sections

Even Carl Icahn, one of President-elect Donald Trump's biggest cheerleaders on Wall Street, thinks the post-election exuberance in the stock market has gotten a bit out of hand. More

Republican leaders keep saying Obamacare is hurting the economy and killing jobs, but there's scant evidence for it. In fact, a number of studies show that the economy has been growing. More

Some of the hottest products of the year cost well under $100, from gaming consoles and VR headsets to drones. More

The Los Angeles city attorney is suing four major retailers over claims that they deliberately inflated the original price on some items that misled customers into thinking they were getting a better deal. More