Today, the Basel Committee on Bank Supervision announced that the Group of Governors and Heads of Supervision (the Committee's oversight body) has approved "a substantial strengthening of existing capital requirements," including an increase in the minimum common equity requirement from 2% to 4.5% and a 2.5% common equity "capital conservation buffer," intended to enhance banks' ability to "withstand future periods off stress" and resulting in an aggregate 7% common equity requirement. The Committee said these actions reinforce the "stronger definition of capital agreed by the Governors and Heads of Supervision in July and the higher capital requirements for trading, derivative and securitisation activities to be introduced at the end of 2011." Also today, the Federal Reserve, OCC and FDIC issued a joint press release announcing their support for the agreement announced today.
The increased minimum common equity requirement will be phased in by January 1, 2015. The Tier 1 capital requirement will increase from 4% to 6% over the same period and the scope of what instruments will qualify as Tier 1 capital will be narrowed. The new capital conservation buffer is intended to "be used to absorb losses during periods of financial and economic stress. Although banks will be "allowed to draw on the buffer during such periods of stress, the closer their regulatory capital ratios approach the minimum requirement, the greater the constraints on earnings distributions."
In addition to the capital conservation buffer, a new countercyclical buffer within a range of 0% to 2.5% will be "implemented according to national circumstances" and "will only be in effect when there is excess credit growth that is resulting in a system wide build up of risk."
Finally, the Committee reports that "these capital requirements are supplemented by a non-risk-based leverage ratio that will serve as a backstop to the risk-based measures." The current 3% minimum Tier 1 leverage requirement will remain in effect "during the parallel run period" and, "based on the results of the parallel run period, any final adjustments would be carried out in the first half of 2017 with a view to migrating to a Pillar 1 treatment on 1 January 2018 based on appropriate review and calibration."
The rules will be presented for approval at the upcoming G-20 summit in November, but will not become effective until implementing regulations are adopted in member countries.