Q&A: How are Basel III bank rules being finalized?

LONDON Fri Sep 10, 2010 6:33am EDT

LONDON (Reuters) - Central bank governors and heads of supervision from 27 countries meet in the Swiss town of Basel on Sunday to agree tougher bank capital and liquidity standards.

The Group of 20 leading countries (G20) called for the Basel III reform to apply lessons from the financial crisis so that states are less likely to have to rescue banks again in the next crisis.

Deutsche Bank is set to lead rivals raising billions of euros in order to meet the new requirements.

WHO IS MEETING?

The Group of Governors and Heads of Supervision meets on September 12 and is expected to approve a set of recommendations to finalize Basel III by fixing the new, higher levels of capital and liquidity banks will have to hold and the timespan for complying.

The Group is the oversight body of the Basel Committee on Banking Supervision, which comprises of regulatory and central bank representatives from nearly 30 countries.

The Basel Committee agreed a set of recommendations on capital levels and phase-in periods at its Sept 7 meeting without publishing details.

The Group of Governors and Heads of Supervision is chaired by Jean-Claude Trichet, president of the European Central Bank and includes other leading governors such as Federal Reserve Chairman Ben Bernanke and Mervyn King from the Bank of England.

WHAT'S BEING DECIDED?

** Core Tier 1: Bankers, regulators and analysts expect a new ratio of 4.5 to 6 percent. This compares with a core ratio of about 2 percent under the current Basel II global accord.

The core ratio will have to be in the form of retained earnings or shares. Many leading banks already hold Tier 1 capital of 10 percent or more.

** Capital conservation buffer: A new buffer that will sit on top of Tier 1. If a bank fails to stay above the buffer, it faces restrictions from supervisors on payouts such as bonuses, dividends and share buybacks.

Size of buffer expected to be set at 2 to 3 percent but unclear what quality of capital will be required.

** Countercyclical buffer: A new buffer banks will have to build up if supervisors see excessive credit levels in the broader economy. It could tapped when the economy turns sour and sparks losses on bank loans. This buffer expected to be set at 2-3 percent.

WHEN WILL THE RULES KICK IN?

Bankers and analysts expect banks to have to start introducing the new rules from 2013, with between five and 10 years to fully implement the reform which also contains other elements that have already been finalized, such as a leverage ratio and long-term liquidity rules.

Separate, tougher capital rules for bank trading books are due to take effect at the end of 2011 after being delayed a year.

WHAT IS THE NEXT STEP?

It is unclear if the new rules will be unveiled on Sunday evening or Monday morning.

Leaders of the Group of 20 countries, who called for the reform, will give final approval to Basel III in November.

(Editing by Ron Askew)

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