Regulators agree tough new rules on banks’ capital levels
A GLOBAL committee of top regulators has agreed on a raft of strict rules that will dictate how much banks have to hoard in capital reserves and how much they can borrow.
The Basel Committee has agreed tough new regulations to prevent banks from building up giant levels of debt in a bid to prevent a repeat of the devastating collapse of US investment bank Lehman Brothers.
Firms like Lloyds Banking Group, which has fallen under government control due to the financial crisis, may have to go to markets to raise cash to meet the strict new demands.
Banks will only be allowed to borrow up to 25 times the value of their own assets, when the rules take effect by the end of 2010.
Lenders are also likely to face new rules ensuring at least half of their capital reserves are made up of high-quality assets.
These can include common equity, as opposed to preferred shares, and retained earnings – profits which are not distributed to shareholders in the form of dividends.
The rules will crystallise principles agreed at the G20 meeting of finance ministers in London this weekend.