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Basel Committee determines new measures against bubbles

12 January 2011 09:06 (UTC +04:00)

Baku - APA-Economics. Banking regulators have quietly taken a major step towards harmonised global regulation by agreeing to raise worldwide capital requirements whenever an individual country declares a credit bubble, Financial Times reported.
Part of the larger â€œBasel IIIâ€ banking reform package, the â€œcountercyclical capital bufferâ€ heralds a step change in the way national banking regulators interact and is the first concrete example of â€œmacroprudentialâ€ regulation that seeks to moderate the economic cycle.
The agreement, struck last month, says that if a country decides its economy is overheated â€“ based on the ratio of credit to gross domestic product â€“ it can require banks within its borders to hold extra capital against potential losses.
Regulators in every other country would have to follow suit and impose a proportional surcharge on their own banks, based on the size of those institutionsâ€™ exposure to the bubble country.
Once the bubble pops, regulators could reduce or remove the buffer, allowing banks to use the extra capital to absorb losses.
All 27 members of the Basel Committee on Banking Supervision signed on to this first-of-its-kind agreement, including the worldâ€™s biggest economies.
The agreement surprised many regulatory lawyers and observers who had expected fights to break out over how to combat bubbles and resistance to the cross-border provisions.
The deal is also remarkable for the trust implied by the reciprocal arrangements. If the UK imposes a surcharge, the US is honour-bound to do the same on the UK businesses of its own banks.
It remains to be seen, however, whether any country will have the courage to use the new tools â€“ in some countries, it is not even clear who will impose them. Most analysts said they were unlikely to come into play until the rest of the Basel agreement takes full effect in 2019.
The agreement says that the bubble country can force banks to increase their minimum tier one capital ratio â€“ a key measure of bank strength â€“ by a maximum 2.5 percentage points (from the global minimum of 7 per cent to up to 9.5 per cent). A bank based in another country that does 20 per cent of its business in the bubble country would then receive a proportional surcharge of up to 0.5 percentage points.
While the buffers are designed to protect banks, they are also likely to raise the price of credit, which could help deflate a bubble.
Banking groups said they were concerned some nations would impose buffers more readily than others, creating an uneven playing field. They are also sceptical that once buffers are imposed, they will become permanent, either because regulators never cut them or investors react badly to a reduction.