Banks will be forced to more than double the minimum capital they hold in reserve as part of a shake-up designed to prevent a repeat of the financial crisis.
Central bankers and regulators from 27 countries including the UK agreed to up the amount they hold in common equity from 2% to 4.5% to ensure the system can survive future shocks.
Under the deal hammered out in the Swiss city of Basel yesterday they will also have to hold a capital conservation buffer of a further 2.5%, bringing the total liquidity cushion to 7% of assets and liabilities.
Banks that fail to meet the new requirements could be banned from paying dividends to shareholders until they have bolstered their balance sheets, according to reports.
In a joint release, regulators said the new "Basel III" rules would provide a "fundamental strengthening of global capital standards".
Lord Turner, chairman of the Financial Services Authority (FSA), said the agreement amounted to "a major tightening of global capital standards" that would "play a significant role in creating a more resilient global banking system".
The new requirements should not prove too large a challenge for UK banks, which already have reserves larger than the 7% required.
But there were concerns that additional costs would be passed on to customers meaning higher interest rates on loans and mortgages.
Angela Knight, chief executive of the British Bankers' Association, warned that the cost of borrowing will rise as a result of Basel III, spelling the end of the "cheap money era".
The requirements relating to common equity - seen to be the highest form of loss absorbing capital that banks hold - will be phased in by 2015.
The capital conservation buffer, which will serve to protect banks against a future unexpected downturn, will be in place by 2019.
"The transition timescale will ensure that banking systems can play their role in supporting economic recovery," Lord Turner said.
Low capital levels relative to assets and liabilities meant that many banks were vulnerable when the sub-prime crisis put stress on the overall financial system in 2007/08.
The statement from central bank governors and regulatory chiefs acknowledged that banks have made substantial efforts to raise their capital levels since that time.
But they agreed the move as a further safeguard against a return to the conditions that led to the 2008 meltdown.
Nout Wellink, chairman of the Basel Committee on Banking Supervision and president of the Netherlands Bank, said: "The combination of a much stronger definition of new capital, higher minimum requirements and the introduction of new 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."Reuse content