Global regulators tighten banking rules to avert 2008-type financial collapse

Global regulators seeking to stop banks from making massive profits by taking excessive risks that bought on the global financial collapse in 2008, tightened banking regulations with far reaching rules by forcing banks to increase their capital reserves.

The Basel Committee on Banking Supervision comprising of governors of central bank of 27 countries that met yesterday in Basel, Switzerland agreed on new banking rules of strengthening bank finances and curb excessive risk taking that may lead to another collapse amid a fragile economic recovery.

Under the agreements reached yesterday, the minimum requirement for common equity, the highest form of loss absorbing capital, will be raised from the current 2 per cent to 4.5 per cent after the application of stricter adjustments.

This will be phased in by 1 January 2015. The Tier 1 capital requirement, which includes common equity and other qualifying financial instruments based on stricter criteria, will increase from 4 per cent to 6 per cent over the same period.

The committee said that this reinforces the stronger definition of capital agreed by Governors and Heads of Supervision on 26 July 2010 and the higher capital requirements for trading, derivative and securitisation activities to be introduced at the end of 2011.

The committee also agreed that the capital conservation buffer above the regulatory minimum requirement at 2.5 per cent and be met with common equity, after the application of deductions. The purpose of the conservation buffer is to ensure that banks maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress.