Basel III On Banks: Tough, Not Harsh

BASEL, Switzerland (TheStreet) -- Regulators appear to have come up with a set of capital standards for the international banking community that are tough, but not quite as harsh as some had feared.

Banks will have to maintain a Tier 1 capital ratio of 9% under the new rules, according to media reports citing the German newspaper Die Zeit, which obtained a draft of the Basel III proposal.

Under the current Basel II regulations, banks are required to maintain a total capital ratio of 8%. Tier 1 capital excludes certain types of securities and hybrid instruments that are factored into the broader capital metric. According to Die Zeit, at least 5% of Tier 1 capital would need to be comprised of pure equity or retained earnings.

Additionally, banks will have to maintain an "anti-cyclical capital buffer" of 3% during "boom times." Some economists have argued for such a provision because it would have slowed down the freewheeling lending practices that led up to the subprime bubble.

The Basel Committee on Banking Supervision is meeting on Tuesday to finalize the new rules ahead of a big gathering of top economic and financial leaders at the G-20 summit next month. The Basel group is comprised of regulators from more than two dozen countries. It has been working for over a year to come up with stricter capital standards for the post-crisis banking industry.

Though the committee tends to keep a tight lid on proceedings, during its proceedings reports had emerged that new standards could be a lot harsher than what Die Zeit reported, with Tier 1 requirements in double-digit territory.

There's little concern that banks wouldn't meet requirements now, since the industry has been hoarding capital like mad. Banks have raised hundreds of billions of dollars in equity and been operating much more cautiously in a changed environment. But if capital requirements are too harsh coming out of the downturn, it could hinder the recovery process in the years to come, much like tighter underwriting standards have kept a lid on economic growth.

Bank regulators in individual countries have also been enforcing tighter requirements. For instance, the sweeping financial reform bill passed in the U.S. blocks banks from using trust-preferred securities and other hybrid instruments that had been popular in the past. It also tasks regulators with developing stricter capital requirements.

The largest U.S. banks are already above the new reporter Basel standards. Bank of America (BAC) had a Tier 1 level of 10.7% at June 30, with Tier 1 common - the most shock-absorbent capital metric, comprised of equity and retained earnings - at 8%.