The proposal by global central bankers to make additional capital reserves mandatory by 2019 has been accepted making some of the biggest global banks safer.
The surcharge is part of a spate of steps undertaken following the global economic crisis that forced countries globally into costly bank-bailouts to prevent a systemic collapse.
The proposal will be put forward for public consultation next month, announced The Group of Governors and Heads of Supervision (GHOS) on Saturday.
“The additional loss absorbency requirements are to be met with progressive common equity tier 1 capital requirement ranging from 1 percent to 2.5 percent, depending on a bank’s systemic importance”, the group announced in a statement.
A further 1 percent tier 1 capital may be required if the size of the bank becomes significantly bigger, taking the total requirement to 3.5 percent.
The plans, which requires approval from world leaders (G20) in November, will be implemented between January 2016 and end of 2018.
The proposed capital surcharge will be in addition to the 7 percent of core capital that banks worldwide need to hold under the Basel III rules coming into effect 2013 onwards.
Many of the biggest global banks, however, hold 10 percent or more core capital, comfortably exceeding the higher limit for capital requirements.
The governors have also opted for lesser surcharge than previously estimated, but in return, have made it mandatory that the capital is of top quality – either equity or retained earnings.
This may disappoint some banks which were hoping to use hybrid capital such as CoCos (Contingent Capitals) to meet the extra requirements, but will please countries like the US and Britain, which had taken a more hard-line approach.
The present move does not come as a big surprise, said Dirk Jaeger, Managing Director for supervision matters at Germany’s banks association BdB, “But we regret that bank levies and CoCo bonds do not count for the additional capital buffer”.
The proposal will be effective for the so-called globally systemically important banks (G-SIBs) initially. “These measures will strengthen the resilience of G-SIBs and create strong incentives for them to reduce their systemic importance over time”, the statement from GHOS said.