Buffers for Banks

In a meeting in Switzerland last week the Committee on Banking Supervision, comprising the US Federal Reserve Chairman, Ben Bernanke, and representatives of 26 other countries recently proposed steps to immunise the financial system from future crises. The new rules would:

*make banks double their amount of capital set aside as a buffer against possible losses,
*slash stockholder dividends and executive pay if the stockpile falls short,
*limit lending during economic boom times

The committee decided that a bank’s common equity – the basic capital requirement, money invested by a bank’s owners and stockholders that is available to absorb losses – would increase from an amount equal to 4% of an institution’s loans and other holdings to 7%.

According to the Washington Post 2.5% of that would be considered a buffer to be spent in poor economic conditions. The committee also decided that during periods of excess credit growth each country could raise the capital requirement by as much as 2.5%.

The changes are intended to stabilise the system against sudden shocking losses

Leave a Reply

Your email address will not be published. Required fields are marked *