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Bank stocks rose this week on news that global regulators have agreed on new banking rules aimed at averting another financial collapse, writes Greg Keller.
The new rules, which will gradually require banks to hold greater capital buffers to absorb potential losses, are likely to reshape the credit industry by imposing stricter regulations on credit cards, mortgages and other loans.
During a press conference Deutsche Bank's chief executive, Josef Ackermann said that he thought the Basel III package was a good one.
"I think the decisions that were taken are the right decisions, they go in the right direction, and I also believe that they gave the banking industry more time for implementation. That clearly reduces the effects on the real economy, which is also very positive. So it's a well rounded package that we fully support."
Under the new rules endorsed on Sunday, banks will have to significantly increase their capital reserves to strengthen their finances and rein in some of their risk-taking - a move that some banks had warned could dampen the recovery by forcing them to reduce the lending that fuels economic growth.
Requiring banks to keep more capital on hand will restrict the amount of loans they can make, but it will help them to withstand the blow if many of those loans go sour. The rules also are intended to boost confidence that the banking system won't repeat past mistakes.
Down the line, consumers could see banks tighten their rules on loans and possibly impose higher banking charges as financial institutions spend the next few years building reserves to meet the new regulatory requirements.
Under current rules, banks must hold back at least 4 per cent of their balance sheet to cover their risks. This mandatory reserve - known as Tier 1 capital - would rise to 4.5 per cent by 2013 under the new rules and reach 6 per cent in 2019.
In addition, banks would be required to keep an emergency reserve known as a 'conservation buffer' of 2.5 per cent.
US officials including Federal Reserve chairman Ben Bernanke issued a joint statement calling the new standards a 'significant step forward in reducing the incidence and severity of future financial crises'.
Representatives of the Fed, the ECB and other major central banks agreed to the deal on Sunday at a meeting in Basel, Switzerland. It still has to be presented to leaders of the Group of 20 forum, which consists of rich and developing countries who will convene at a meeting in November.
Fred Cannon, a banking analyst at Keefe, Bruyette & Woods, said the rules will probably reduce bank profit margins and lending from the heights they reached in 2007. But he added that before 2000, many banks were already operating with enough capital reserves to meet the new minimums.
In addition, banks would be required to keep an emergency reserve known as a 'conservation buffer' of 2.5 per cent.
US officials including Federal Reserve chairman Ben Bernanke issued a joint statement calling the new standards a 'significant step forward in reducing the incidence and severity of future financial crises'.
Representatives of the Fed, the ECB and other major central banks agreed to the deal on Sunday at a meeting in Basel, Switzerland. It still has to be presented to leaders of the Group of 20 forum, which consists of rich and developing countries who will convene at a meeting in November.
Fred Cannon, a banking analyst at Keefe, Bruyette & Woods, said the rules will probably reduce bank profit margins and lending from the heights they reached in 2007. But he added that before 2000, many banks were already operating with enough capital reserves to meet the new minimums.
