Bankers Agree to New Rules to Prevent Further Financial Crisis

Tom Chieppo

Banks are significantly trying to increase the capital reserves under rules endorsed on Sunday by the World Major Central Banks to prevent another financial crisis, without impeding the economy in Basel, Switzerland.  The Banks are forced to keep more capital, which will restrict the amount of loans they can make.

The new banking rules are designed to strengthen bank finances and rein in excessive risk-taking. However, some banks have protested because the rules may dampen their recovery and reduce the economic growth.

Under current rules, banks must hold back at least four percent of their balance sheet to cover their risks.  This is a mandatory reserve known as tier capital. This amount will rise to four and a half percent by 2013 under the new rules; it is expected to reach six percent in 2019.  However, banks would be required to keep an emergency reserve known as a “conservation buffer” of two and a half percent.  This will allow the banks to reserve eight and a half percent on their balance sheets.

The agreement known as Basel III is a cornerstone of global financial reforms proposed by governments to bailout banks to recovery the economy as quickly as possible.