Banks may need to hike capital reserves

Banks worldwide may be asked to raise minimum capital reserves by several percentage points to help them weather the next financial crisis, according to Nout Wellink, Chairman of the Basel Committee on Banking Supervision.

Current requirements are “still not enough”, Wellink said today in Kuala Lumpur, where he was attending a forum on microfinance. The Basel proposal, still under discussion, may be completed in the first half of next year, he said.

The US Federal Reserve is due to publish tomorrow the results of stress tests on banks that may determine how much more capital they need to raise. Worldwide, lenders should focus on the quality of capital, rather than just the size of reserves, Wellink said, adding that the current crisis is far from over. “It will make the world a lot safer, but I’m not sure it’s going to be enough to zero the risks,” said Joseph Tan, Singapore-based chief Asian economist at Credit Suisse Group. “This is one small piece in a greater puzzle, and derivatives markets may need separate attention,” Tan said.

The Basel Committee on Banking Supervision said in March that banks will have to hold more capital, though it didn’t say by how much requirements may rise from the global benchmark of about 8 per cent of assets. The committee drafts capital-adequacy guidelines that each country decides for itself how to apply.

“I wouldn’t exclude that the capital buffer, the size of the buffer, would amount to several percentage points beyond the existing minimum,” Wellink told reporters today. “But it’s important to add one thing – we will build up the buffer only after the crisis.”

Wellink, also a European Central Bank (ECB) council member, declined to comment on the monetary policy before tomorrow’s ECB meeting. The ECB will probably lower its benchmark rate by a quarter percentage point to 1 per cent, according to a Bloomberg survey of economists.

There’s “anecdotal evidence” the global economic crisis is easing, though there are also negative indicators, said Wellink. It’s a “mixed picture” because financial institutions haven’t yet stabilised, he added.

So-called dynamic provisioning, where banks accumulate money during good times to create a buffer during slowdowns, is “not a bad idea” to introduce worldwide to prepare for the next crisis, said Wellink.

Details of any proposal haven’t been agreed on, he said.