Friday 18 December 2009

Strengthening the resilience of the banking sector - Basel Committee consultation paper

The Basel Committee has published a consultation paper containing significant reforms to the international regulatory framework governing banks, the purpose of which is to raise the quality, consistency and transparency of the regulatory capital base. Amongst the proposals is one dealing with capital conservation: the introduction of capital distribution constraints in a 'buffer range' above the regulatory minimum capital requirement. Distributions in this context include dividends and discretionary bonus payments. The Committee justifies this approach to capital conservation thus (p. 69):

... at the onset of the financial crisis, some banks continued to pay out dividends even though their individual financial condition and the outlook for the sector were deteriorating. Much of this activity was driven by a sense that discretionary reductions in distributions could be seen as a sign of weakness. These actions made individual banks and the sector as a whole weaker. More recently, a number of banks have been quick to reinstate dividends and discretionary bonus payments while the banking sector remains in a fragile state, reducing the resilience of individual banks and the sector as a whole if the recovery falters. To ensure that best practice is adopted by the banking sector as a whole, and to remove the temptation for banks to distribute more in an attempt to signal strength, whilst their financial condition has weakened, the Basel Committee has developed a proposal for capital conservation standards".

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