Markets laud new bank rules, but work remains | business | Hindustan Times
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Markets laud new bank rules, but work remains

business Updated: Sep 14, 2010 23:40 IST

Stock markets cheered new regulations announced this weekend that were intended to prevent a recurrence of the financial crisis, but central bankers cautioned that officials still must forge agreements to limit short-term bank risk and deal with institutions considered too big too fail.

“We have hard work to do still,” Jean-Claude Trichet, president of the European Central Bank, said during a news conference here, after central bankers and bank regulators from 27 countries agreed on Sunday to require banks to more than triple the amount of capital they held in reserve.

“It’s a work in progress on a large front,” said Trichet, who was chairman of the Basel group.

The group endorsed a plan to require banks to raise the amount of common equity they held, considered the least risky form of capital, to 7 per cent of assets, from 2 per cent. That requirement is the centerpiece of a host of new rules aimed at increasing banks’ ability to absorb market shocks.

Still, shares of banking companies rose Monday as investors welcomed the agreement in Basel and expressed relief that banks would have plenty of time to adjust to the new rules. Investors may also have simply been relieved that the agreement provided more certainty about the shape of future regulation.

But the authorities plan to develop additional rules that will apply to large, cross-border banks that can rock financial markets when they get in trouble — as happened when Lehman Brothers failed in September 2008. “These institutions are still too big and interconnected to fail,” said Mario Draghi, governor of the Bank of Italy.

He said regulators needed to deal with the problem known as moral hazard, in which large institutions are tempted to take on too much risk because their executives believe that governments will always bail them out. The New York Times