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Bank watchdogs agree Basel III capital overhaul

Regulators double reserve ratios to protect against collapses

European regulators and central bank governors yesterday demanded banks across the regions more than double their capital reserves to protect against future shocks in the financial markets.

The Group of Governors and Heads of Supervision were locked in negotiations throughout the day at the Bank for International Settlementsin the Swiss city of Basel, as they set about hammering out the details of the so-called Basel III reforms.

The Basel Committee on Banking Supervision, which oversaw the meeting, last night announced the talks had been successful.

European Central Bank president Jean-Claude Trichet, who chaired the meeting, said: "The agreements reached today are a fundamental strengthening of global capital standards." He added that the contribution of the new rules 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".

The reforms, which fill in the gaps left by the general Basel III agreements made in July, will demand the banks have a "core" tier-one capital holding – the equity they keep in reserve – of 4.5 per cent, up from 2 per cent. There will be a further buffer of 2.5 per cent. Institutions that fail to meet the buffer will be blocked from dividend payments.

Nout Wellink, chairman of the banking supervision committee and president of the Netherlands Bank, said: "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." The agreement comes just days before the second anniversary of the collapse of Lehman Brothers. The new rules must be ratified by the G-20 nations in Seoul in November, before they are phased in by January 2015.

Yet, some fear that forcing banks to hold more of their capital in reserve could slow a recovery and increase the cost of finance. Before yesterday's agreement Alessandro Profumo, chief executive of Italian banking group Unicredit and head of the European Banking Federation (EBF), warned the policy-makers against imposing draconian levels of capital. He said in a letter to Mr Trichet the EBF's members were concerned about the effect these measures could have on lending. "A well-balanced calibration of the proposals will be crucial if we are not to put European jobs and growth at risk," he added.

Angela Knight, the head of the British Bankers Association warned that the cost of financing will go up, saying that just like any other business, if a bank's fixed costs go up, "then so does the price of its product".

Some banks have already begun preparation. Deutsche Bank yesterday confirmed it was to launch a rights issue to raise at least €9.8bn (£8.09bn). While the majority was to be used to secure the acquisition of Postbank, some of the proceeds are expected to bolster the group's balance sheet. Analysts expect banks across Europe to comply with the regulations.

Despite the turmoil among some of the UK's banking groups during the downturn, the latest European reforms will have little impact.

The City regulator, the Financial Services Authority, already demands the banks hold double the previous level of the European minimum. Lloyds Banking Group is the most lightly capitalised, with a tier-one capital ratio of 9 per cent.