Global bank regulators reached an agreement this week on rules to create a more stable global financial system. While regulators agree the new rules are needed, they also warned that there will be consequences. The new regulations will most likely lower profits for the large banks which will increase the cost of credit as well as restrict credit. While the agreement has been reached today, the deal won’t be ratified until November with the next meeting of the Group of 20 leading nations takes place.
The new system requires banks to have a higher percentage of capital reserve than has previously been required. For years, the core level of basic capital reserves was set only 2%, an amount clearly too low as shown by the recent financial crisis. The new agreement sets the capital ratio to between 7% and 9% of risk bearing assets which includes a capital conservation buffer. While regulators are confident that this will increase the stability of the economic system, others are concerned that the recovery is too new and new regulations now would hinder that recovery.
Regulators are aware that this is not a process that will take place overnight and the entire system is expected to phase in over the next 5 to 10 years. Once the new regulations are ratified in November, banks will have to start complying in 2013. The percentage of capital reserve will gradually increase over the next several years.