New global rule: Banks must keep more cash to weather crises
International banking regulators agreed Sunday on global rules that would require banks to keep enough cash and liquid assets on hand to survive an acute 30-day crisis.
International banking regulators agreed Sunday on global rules meant to ensure banks keep enough cash in hand to survive future market crises, and gave banks until 2019 to comply fully.
The rules will require banks in the future to hold enough cash, and assets such as equities, corporate and government bonds that can easily be sold, to tide them over during an acute 30-day crisis.
The body that oversees the Basel Committee on Banking Supervision, which sets international rules, said Sunday that they will have to hold 60 percent of that amount when the rules start being phased in on Jan. 1, 2015; that will increase by 10 percentage points every year until the standards take full effect at the beginning of 2019.
The oversight body's head, Bank of England governor Mervyn King, said after regulators met in Basel, Switzerland, that the time frame ensures the new standards "will in no way hinder the ability of the global banking system to finance the recovery." The hope is that it will prevent lenders from becoming over-reliant in the future on help from central banks, which have stepped in over recent years to keep the financial system flush with cash.
King said that "the vast majority" of the world's biggest banks "already hold liquid assets well above the minimum required by this standard."
The rules are part of wider efforts to prevent another shock to the financial system like that prompted by Lehman Brothers' 2008 collapse, which led to taxpayer-funded bailouts of banks in the US and Europe.
They are part of the so-called Basel III package of reforms. That package will require lenders to increase their highest-quality capital — such as equity and cash reserves — gradually from 2 percent of the risky assets they hold to 7 percent by 2019.