Basel Committee Plans to Avoid Bubbles With Capital

The Basel Committee on Banking Supervision proposed making banks hold more capital during lending booms to protect against losses in future downturns.

National regulators would tell banks 12 months in advance how much additional capital they would have to hold during times of “excess credit growth,” the committee, which sets capital standards for banks worldwide, said in a statement today. Banks that fail to meet so-called extended capital buffers would be limited from paying dividends to shareholders.

“It should be deployed when excess aggregate credit growth is judged to be associated with a build-up of system-wide risk to ensure the banking system has a buffer of capital to protect it against future potential losses,” the committee, based at the Bank for International Settlements in Basel, said in a consultation document today.

The 36-year-old Basel committee of central bankers and regulators was asked by the Group of 20 nations to draft new rules after the worst financial crisis in 70 years caused firms to write off $1.8 trillion. G-20 leaders urged the committee to improve the quantity and quality of bank capital, strengthen liquidity requirements and discourage excessive leverage. They set a deadline of December for making the rules and originally gave countries until the end of 2012 to implement them.

The committee proposed monitoring the ratio between credit and gross domestic product as a basis to decide when capital buffers need to be increased. “The credit-to-GDP ratio tends to rise smoothly well above trend before the most serious episodes,” the committee said.

Banks were asked to respond to the proposal by Sept. 10.