Central Bank Governors and Heads of Supervision announce comprehensive response to the global banking crisis
September 7, 2009: The Group of Central Bank Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, reviewed today a comprehensive set of measures to strengthen the regulation, supervision and risk management of the banking sector. These measures will substantially reduce the probability and severity of economic and financial stress.
President Jean-Claude Trichet, who chairs the Group, noted that “the agreements reached today among 27 major countries of the world are essential as they set the new standards for banking regulation and supervision at the global level”.
Mr Nout Wellink, Chairman of the Basel Committee and President of the Netherlands Bank, stated that “central banks and supervisors have responded to the crisis by strengthening microprudential regulation, in particular the Basel II framework. We are working toward the introduction of a macroprudential overlay which includes a countercyclical capital buffer, as well as practical steps to address the risks arising from systemic, interconnected banks”.
The Central Bank Governors and Heads of Supervision reached agreement on the following key measures to strengthen the regulation of the banking sector:
• Raise the quality, consistency and transparency of the Tier 1 capital base. The predominant form of Tier 1 capital must be common shares and retained earnings. Appropriate principles will be developed for non-joint stock companies to ensure they hold comparable levels of high quality Tier 1 capital. Moreover, deductions and prudential filters will be harmonised internationally and generally applied at the level of common equity or its equivalent in the case of non-joint stock companies. Finally, all components of the capital base will be fully disclosed.
• Introduce a leverage ratio as a supplementary measure to the Basel II risk-based framework with a view to migrating to a Pillar 1 treatment based on appropriate review and calibration. To ensure comparability, the details of the leverage ratio will be harmonised internationally, fully adjusting for differences in accounting.
• Introduce a minimum global standard for funding liquidity that includes a stressed liquidity coverage ratio requirement, underpinned by a longer-term structural liquidity ratio.
• Introduce a framework for countercyclical capital buffers above the minimum requirement. The framework will include capital conservation measures such as constraints on capital distributions. The Basel Committee will review an appropriate set of indicators, such as earnings and credit-based variables, as a way to condition the build up and release of capital buffers. In addition, the Committee will promote more forward-looking provisions based on expected losses.
• Issue recommendations to reduce the systemic risk associated with the resolution of cross-border banks.
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