Global regulators are seeking to toughen curbs on how much business large global banks can do with each other as part of a push to prevent lenders from keeping risks too concentrated.
A “key lesson from the crisis is that material losses in one systemically important financial institution can trigger concerns about the solvency of other SIFIs, with potentially catastrophic consequences for global financial stability,” the Basel Committee on Banking Supervision said today in a statement on its website.
The group said it wants input on how to strengthen so-called large-exposure limits that force banks to diversity the range of companies and other lenders they work with. The Basel group is drafting updated risk concentration limits as part of a third wave of measures to overhaul bank rulebooks since the financial crisis that followed the collapse of Lehman Brothers Holdings Inc.
The world’s 101 biggest banks would have needed an extra 208.2 billion euros ($268 billion) to meet post-Lehman capital rules drawn up by the Basel group, had the standards been enforced in June 2012, the committee said earlier this month. The measures, known as Basel III, are scheduled to fully take effect in 2019.
Under today’s proposals, a bank identified by regulators as being of global systemic importance should be prevented from investing an amount equivalent to more than 15 percent of its core capital in transactions with another bank of similar size and importance.
The plans would add to existing Basel guidance that the amount of business a bank can do with a single counterparty should be capped at no more than 25 percent of its capital.
“The appropriate large exposure limit” between two lenders important to the global financial system “should be between 10 percent and 15 percent of the eligible capital base,” the Basel group said. “A limit that is tighter than the general limit would reduce the risk of contagion.”
The Basel committee brings together regulators from 27 nations, including the U.S., U.K. and China, to coordinate rules for banks.
Work on the updated large exposure rules will be completed by the end of 2014, Stefan Ingves, the Basel committee’s chairman, said earlier this month.