Basel Plan Aims to Force Banks to Increase Capital

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This is the VOA Special English Economics Report.

The financial crisis of two thousand eight brought attention to a big problem with banks. Many banks did not have enough money in reserve to protect against their losses. Now there is a proposed solution.

On Sunday, banking supervisors from twenty-six nations and Hong Kong met in Basel, Switzerland. They announced proposals to make banks safer by requiring them to increase their reserves.

The Basel Committee on Banking Supervision has been working on a set of recommendations known as Basel Three. These are based on agreements reached in July by officials from a group of leading industrial nations.

The goal is to stop the cycle of easing rules on banks in good times and tightening them only after a crisis.

Under the new rules, banks would have to hold reserves equal to seven percent of their risk-weighted assets. Mainly this means loans. Currently banks are required to hold two percent in reserve.

The bigger reserves could be in the form of cash or common stock, also known as common equity. Banks would also have to hold extra reserves as their national economies improve.

The new requirements would go into effect starting in January of two thousand thirteen. Banks would have five years to fully meet them. International banking lawyer Ernie Patrikis, a former vice president of the Federal Reserve Bank of New York, explains why.

ERNIE PATRIKIS: "We cannot be telling banks, on the one hand, raise capital right away, and on the other hand lend more."

Economic growth remains slow in much of the developed world. The worry is that any decrease in lending could hurt a global recovery.

One way for banks to meet the proposed new rules would be to sell more of their stock. That is what Germany’s Deutsche Bank did last week. It announced a sale offer valued at over eleven billion dollars.

Ernie Patrikis thinks chief executive officers of banks have three choices.

ERNIE PATRIKIS: "One is to go out and raise more common equity. Another one is to not pay dividends.  And that’s not something most CEO’s want to do because their shareholders aren’t going to be particularly happy.  And the third choice is sell assets -- downsize the bank."

Nations on the Basel committee will now seek to pass the new rules into law so their banking supervisors can enforce them.

Banks that fall below the reserve limits could have to stop paying dividends to shareholders or bonuses to top employees. Ending dividends would anger shareholders. And limiting pay could send bankers fleeing to hedge funds, where there are fewer rules.

And that’s the VOA Special English Economics Report, written by Mario Ritter. For more business news visit us at voaspecialenglish.com.  And follow us on Facebook, Twitter, Youtube and iTunes at VOA Learning English.  I’m Steve Ember.

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