International banking regulators have agreed on new capital requirements for global banks.

Following a meeting in Switzerland on Sunday, the group of central bank governors and banking regulators known as the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced that they have agreed to a “substantial strengthening” of existing capital requirements.

The agreement includes raising the minimum requirement for common equity from the current 2% level to 4.5%, and boosting the Tier 1 capital requirement from 4% to 6%. These new levels will be phased in by January 1, 2015.

Additionally, they agreed that the capital conservation buffer above the regulatory minimum requirement be calibrated at 2.5%, and that it be met with common equity. “The purpose of the conservation buffer is to ensure that banks maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress. While banks are allowed to draw on the buffer during such periods of stress, the closer their regulatory capital ratios approach the minimum requirement, the greater the constraints on earnings distributions,” the regulators explained.

A countercyclical buffer of 0% between 2.5% of common equity, or other fully loss absorbing capital, will also be implemented during times of rapid credit growth. The purpose of the countercyclical buffer is to push banks to build up their capital as their risk accumulates too.

Along with the tougher capital requirements regulators will also impose a non-risk-based leverage ratio, although that won’t be implemented until 2018.

The regulators also declared that systemically important banks should have loss absorbing capacity beyond these new standards, and that they are continuing to work on this issue at the Financial Stability Board and the Basel Committee, which could include combinations of capital surcharges, contingent capital and bail-in debt.

The capital reforms, and the planned introduction of a global liquidity standard, will be presented to the G20 Leaders summit to be held in Seoul in November.

Nout Wellink, chairman of the Basel Committee on Banking Supervision and president of the Netherlands Bank, said that, “the combination of a much stronger definition of capital, higher minimum requirements and the introduction of new capital buffers will ensure that banks are better able to withstand periods of economic and financial stress, therefore supporting economic growth.”

Jean-Claude Trichet, president of the European Central Bank and chairman of the Group of Governors and Heads of Supervision, said that that, “their contribution to long term financial stability and growth will be substantial. The transition arrangements will enable banks to meet the new standards while supporting the economic recovery.”

U.S. banking regulators came out in favour of the measures announced saying, “The agreement represents a significant step forward in reducing the incidence and severity of future financial crises, providing for a more stable banking system that is less prone to excessive risk-taking, and better able to absorb losses…”

IE