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| Global bankers agree new capital reserve rules | |
| (about 9 hours later) | |
| Central bank governors and senior regulators have agreed new rules designed to prevent a repeat of the recent financial crisis. | |
| At a meeting in the Swiss city of Basle, they agreed a deal requiring banks to hold more capital in reserve. | |
| BBC business editor Robert Peston says the deal is an important milestone in banking reform. | |
| He says it should mean banks having a greater ability to absorb losses in future crises without taxpayer help. | |
| Lord Turner, chairman of the UK's Financial Services Authority, said the new rules represented "a major tightening of global capital standards and will play a major role in creating a more resilient global banking system". | |
| European Central Bank chief Jean-Claude Trichet said the new regulations - called Basle III - were "a fundamental strengthening of global capital standards". | |
| "The transition arrangements will enable banks to meet the new standards while supporting the economic recovery," he added. | |
| Low levels of capital relative to assets were a major factor in the recent global financial crisis. | Low levels of capital relative to assets were a major factor in the recent global financial crisis. |
| Any agreement will still need to be ratified by the heads of government of the G20 group of nations at their summit in November. | Any agreement will still need to be ratified by the heads of government of the G20 group of nations at their summit in November. |
| At present the "tier one capital ratio" is 4%. The ratio is a measure of banks' cushion against future losses. Our correspondent says in future it will be at least 7%. | |
| The tier one capital ratio is made up of equity - its shares - and retained earnings. If a bank makes losses on loans, it is the shareholders who take this loss. | The tier one capital ratio is made up of equity - its shares - and retained earnings. If a bank makes losses on loans, it is the shareholders who take this loss. |
| However, once all of a bank's equity is eaten up by losses, the bank becomes insolvent - in other words its assets are no longer worth enough to repay all of its debts. | However, once all of a bank's equity is eaten up by losses, the bank becomes insolvent - in other words its assets are no longer worth enough to repay all of its debts. |
| The new requirement should prove little problem for UK banks, as it is in fact lower than the 8-9% ratio currently held by them. | The new requirement should prove little problem for UK banks, as it is in fact lower than the 8-9% ratio currently held by them. |
| It is also well below the 10% level that was being pushed for by the UK, the US and Switzerland. | It is also well below the 10% level that was being pushed for by the UK, the US and Switzerland. |
| The updated rules will mean some banks will need to raise a lot more money from shareholders. | The updated rules will mean some banks will need to raise a lot more money from shareholders. |
| The rules may have the effect of limiting lending, at least in the short term, as most banks - particularly those in Europe - have too little capital for the loans they have already made. | The rules may have the effect of limiting lending, at least in the short term, as most banks - particularly those in Europe - have too little capital for the loans they have already made. |