Main Elements of Tougher Basel III Global Bank Rules
European Union regulators start implementing tougher global bank rules known as Basel III from January 2013 so that lenders can withstand market shocks better and are less likely to need taxpayers to bail them out. But not all the measures will be ready.
The main elements are:
* Higher and better-quality core capital buffer:
Banks must have a capital buffer equivalent to 7 percent of their risk-weighted assets by the start of 2019, roughly triple the amount under existing rules. It must be in the form of shares or retained earnings, meaning lower-quality assets like hybrid debt will no longer count. Market and regulatory pressure have already forced many banks to hold or exceed the new Basel minimum.
* New liquidity buffer:
Banks must build up a buffer of top-quality government and corporate bonds or cash from 2015 so they can withstand 30 days of net withdrawals without needing outside help. Some banks had to be rescued in the 2007-09 crisis because they ran low on liquidity, rather than not having enough capital.
Regulators are expected to give banks flexibility to use a wider range of eligible assets and comply with a less stringent "stress scenario" for the liquidity buffer.
* Leverage ratio:
The introduction of this cap on debt from 2015 -- which shows the total level of lending in relation to the amount of capital a bank holds -- will act as a blunt backstop to the more sophisticated calculation of capital buffers.
* Derivatives risk charge:
A new credit value adjustment (CVA) capital charge will be slapped on banks based on the risk of bankruptcy at derivatives customers.
In some cases the hefty charge is likely to be passed on to the customer, such as airlines who use derivatives to hedge risks like moves in jetfuel prices. The complexity and resistance to the charge means it may not be fully implemented on time for the January 2013 start date in Europe.
* Big banks surcharge:
World leaders have agreed that the top 29 or so banks in the world must also hold an extra 1-2.5 percent capital on top of the 7 percent Basel minimum, phased in from 2016 to 2019, because of the risk their collapse would pose to the global financial system.