* Regulatory body wants banks to keep more funds on hand
* Definition of acceptable capital would be tightened
* Investors fear new rules could see banks scramble for cash
* Rules to take effect by end-2012, but may be delayed
* European bank stocks slide in response
(recasts with details of capital rules, analysis)
By John O'Donnell and Sven Egenter
ZURICH/ BRUSSELS, Dec 17 Banks face having to
set aside more funds or raise fresh capital from investors in as
little as three years, according to proposals by a global
regulatory body that could change the way bankers do business.
Seeking to prevent a repeat of this year's financial crisis,
the Basel Committee of central bankers and financial supervisors
on Thursday demanded higher requirements for the capital which
banks maintain to shield depositors and shareholders from loss.
Also, the definition of acceptable capital would be narrowed.
Although the recommendations are not binding, they herald a
tougher regime for banks; regions such as the European Union
will use them as a reference, and higher capital requirements
may end up slowing down lending or investment banking business.
On Thursday, the EU said it was studying the Basel report.
"There were a lot of areas in finance which were hardly
regulated, such as investment banking," said Rym Ayadi, industry
expert with the Centre for European Policy Studies.
"If these new rules are implemented...this would be the end
of that. It could change the way banks work, making them more
focused on financing the real economy."
European bank shares fell on Thursday partly in response to
the Basel Committee's report, as investors fretted that tighter
capital requirements could force banks to issue more shares to
The DJ Stoxx index of the region's bank stocks .SX7P slid
2.7 percent, while Britain's Lloyds (LLOY.L), highlighted by
Credit Suisse analysts as particularly vulnerable to tougher
regulation, tumbled 8.1 percent. [ID:nLDE5BG209]
(for a factbox on key elements of the Basel report, click
The Basel Committee did not come up with specific numbers
for higher capital requirements on Thursday; they will be worked
out in consultation with national regulators next year.
The committee wants the changes to take effect by the end of
2012, but they may be postponed if the global economy is still
struggling at the time, the committee's secretary general Stefan
Walter told Reuters.
"We are going to do an impact assessment and finalise the
proposals by the end of next year. By then, we will also make a
decision about the appropriate implementation time line. That
depends on the economic development," he said.
Global regulatory sources told Reuters on Wednesday that the
new requirements would be implemented gradually and flexibly,
giving banks enough time to adjust. Regulatory changes
introduced by the committee in 2004 came with 10-year transition
periods for some requirements. [ID:nTOE5BF01O]
However, the latest measures could be revolutionary for some
banks; among other things, the committee wants the first-ever
global introduction of a leverage ratio, which would force each
bank to set aside a fixed amount of capital based on the size of
its balance sheet.
The committee also aims to restrict the types of capital on
which a bank can rely to prove its financial stability. In
future, lenders should primarily use retained profits and
shareholder equity, the most liquid form of assets on a bank's
balance sheet, the committee said.
This is in stark contrast with the past, when banks used a
wide range of assets, many of which crumbled during the
financial crisis. Many European banks use so-called hybrid
capital such as a convertible bonds, for example.
"At first read, it looks pretty punitive," the Credit Suisse
analysts said of the committee's report. "Overall, we believe
this is negative for the European banks sector."
The new rules could reduce banks' freedom to pay dividends,
conduct share buy-backs and pay bonuses to staff, by imposing
"capital distribution constraints" on them if their capital fell
into a certain range.
The committee is eager to have banks build up capital
buffers in good times, reducing their need to raise capital
during economic downturns, when asset sales could weaken
financial markets further.
It also aims to restrict risk-weighting, which has allowed
banks to brand some loans as low-risk and thereby reduce the
capital they hold to cover non-payment.
Another proposed change is the introduction of a minimum
liquidity standard for internationally active banks, based on
how much cash they would need to withstand a financial shock.
Johannes Wassenberg, analyst at Moody's rating agency, said
that while the rules might hurt bank stocks, they could
ultimately boost banks' credit ratings by making them safer, if
banks did not find ways to move business outside the scope of
He said the leverage ratio might not be a major burden on
most banks, since they had already reduced their leverage from
between 30 and 40 times equity before the crisis to 25-30 times,
an area which would probably satisfy regulators.
"A lot of banks have already delevered quite radically since
the fourth quarter of 2008...They already have adjusted."
For a graphic on the capital strength of world banks, click
(Additional reporting by Krista Hughes, Jonathan Gould and
Alexander Huebner in Frankfurt; Editing by Andrew Torchia)