Central bankers and regulators have agreed to impose an extra capital charge of 1% to 2.5% of risk-adjusted assets on the largest banks in a bid to protect them from the big losses that could trigger another financial meltdown.

The agreement, forged in Basel represents a victory for countries like the U.S. and the U.K., which wanted 30 "global systemically important financial institutions" to carry additional capital to make them safer.

After months of wrangling, bankers finally forged a compromise deal that saw agreement on a smaller surcharge in exchange for a buffer made purely of equity.

The surcharge comes on top of the worldwide Basel III minimum of 7% set last year for all banks. That means roughly eight of the biggest, most interconnected banks have to maintain top quality "core tier one capital" equal to 9.5% of their risk-weighted assets by 2019. About 20 more banks will face total ratios of 8% to 9%.

The overseers of the Basel Committee on Banking Supervision also said they reserved the right to impose a further surcharge of 1% -- for a total of 10.5% -- on the top banks if they become even larger or more important to the banking system.

The central compromise saw the top surcharge drop from 3% to 2.5% in exchange for preventing banks from using "contingent capital" -- debt that converts to equity at times of trouble -- to meet the requirements. Many Basel regulators are sceptical of "cocos" because the triggering arrangements have not been tested in a crisis.

Banks will be graded on five characteristics: size, interconnectedness, cross-border activity, complexity and the availability of competitors to pick up their business in a crisis.

People familiar with the discussions have said that JPMorgan ( JPM), Citigroup ( C), Bank of America ( BAC), Barclays ( BCS), HSBC ( HBC), Royal Bank of Scotland ( RBS), BNP Paribas and Deutsche Bank ( DB) are likely to make up the top category.

Goldman Sachs ( GS), UBS ( UBS), Credit Suisse ( CS) and Morgan Stanley ( MS) are expected to be in the second group with a 2% surcharge. The largest Italian, French, Japanese and Spanish banks are also expected to be hit by the surcharge system.

Participants cautioned that the categories are based on 2009 data and the exact calculations may be adjusted over the next few weeks.

"The agreements reached today will help address the negative externalities and moral hazard posed by global systemically important banks," said Jean-Claude Trichet, European Central Bank president, as he stepped down as chairman of the Basel overseers group.

He will be replaced by Sir Mervyn King, Bank of England governor. The Basel Committee will be headed by Stefan Ingves, governor of the Swedish central bank.

Huw van Steenis, Morgan Stanley banking analyst, said the rules would "trim ability of banks to pay dividends" and curb returns making them less appealing for shareholders. "The challenge will be to balance the competing demands."
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