Banks Could Still Face Tougher Capital Requirements to Prevent Crises

FRANKFURT â€" Ever since the end of the 2008 financial crisis, the world’s leaders have searched for ways to shore up the banking system.

Earlier this month, the committee that sets standards for the global financial system proposed changes to a crucial indicator of bank risk in a way that critics considered a sop to big European lenders like Deutsche Bank.

But what looked like capitulation may set the stage for stiffer requirements.

Stefan Ingves, the Swede who leads the Basel Committee on Bank Supervision, hinted in an interview this week that the panel could place further restrictions on the amount of borrowed money that banks are allowed to use to do business.

The Basel Committee has no binding authority to set national banking rules, but it serves as a forum for nations to discuss banking issues and try to harmonize oversight of the financial system.

All of the world’s largest economies are represented on the Basel Committee, including the United States, China, India, Japan, Germany, France and developing countries like Indonesia and Brazil.

Tougher capital requirements would be in line with the thinking by American regulators as well as many economists and academic experts, who say that banks remain precariously dependent on credit that can easily dry up in a crisis.

The debate revolves around the so-called leverage ratio, which is considered one of the most important indicators of a bank’s strength. The ratio is a measure of how much capital banks have in relation to the total value of their assets.

Banks want a low leverage ratio, which would allow them to squeeze more profit from every dollar of their own capital but also exposes them to greater risk. In the past, it has often been taxpayers who had to pick up the pieces.

Mr. Ingves, who is also governor of the central bank of Sweden, said in a phone interview that members of the Basel Committee were still debating how high the leverage ratio should be. But, he said, “I don’t think the leverage ratio is going to move down.”

The Basel Committee’s work can seem mind-numbingly specialized, but it is constructing the main defense against financial crises of the kind that nearly plunged the world into depression after the collapse of the investment bank Lehman Brothers in 2008.

Mr. Ingves oversees the committee’s work and brings to bear his own experience dealing with a severe banking crisis in Sweden in the early 1990s, when he was the head of a government bank rescue authority.

There are differences between that crisis and the one now affecting the euro zone, he said, but both revolved around capital and whether banks had enough of it.

The current proposal would set the leverage ratio at 3 percent, meaning banks must have at least $3 of capital for every $100 they hold in outstanding loans, derivatives or other assets. The new rules would not take full effect until 2018. Many economists consider that ratio to be much too low, and there is a growing sentiment that it should be higher.

United States regulators, who take part in the deliberations of the Basel Committee, have said they will require the largest American bank holding companies to maintain a higher ratio of 5 percent.

The decision on whether the Basel Committee will recommend a higher leverage ratio will made by an assembly of central bankers and bank regulators that oversees the committee’s work.

Mario Draghi, president of the European Central Bank, is chairman of the oversight panel. But as chairman of the Basel Committee, Mr. Ingves is an influential voice who is also familiar with the thinking of regulators around the world.

Mr. Ingves disputed the view of some critics that changes in the rules â€" agreed to this month by the central bankers and national regulators who oversee the Basel Committee â€" were a gift to big investment banks, especially European institutions like Deutsche Bank. At most, the changes will allow banks to adjust their ratios by a few decimal points, Mr. Ingves said.

“The end result is something a little bit tighter than what we started out with in 2010,” Mr. Ingves said. “It’s a sensible measure of leverage when you struggle through all the details.”

The change in the rules that got the most attention when it was announced on Jan. 12 was an adjustment in the way banks add up the value of the derivatives they hold in their portfolios. In some circumstances, banks will be allowed to use one derivative to cancel out another. The practice, known as netting, reduces the amount of capital banks must have. It also makes their leverage ratios look better.

For example, a bank that held a derivative bet on a rise in the price of oil would be allowed to offset it with a bet on a fall in the price. Netting is controversial because it assumes that all the people involved in the transaction would be able to deliver on their side of the bargain. One lesson of the financial crisis that began in 2008 was that, with the world on the verge of an economic meltdown, many of these so-called counterparties would not be able to honor their promises.

The decision to allow some netting was seen as a concession to Deutsche Bank as well as French banks like Crédit Agricole that have especially large portfolios of derivatives. In the past, German and French officials have been outspoken in their opposition to a strict leverage ratio, in what was regarded as an attempt to protect their own large banks.

Indeed, Deutsche Bank shares surged after announcement of the revised rules on Jan. 12. Stefan Krause, chief financial officer of Deutsche Bank, said this week that the share rise reflected investor relief that the rule was not more onerous.

“There was some fear in the market it would be even more difficult,” Mr. Krause said at a news conference on Wednesday. But he also said that the new rules on leverage “still require adjustment.”

Mr. Ingves is scheduled to outline the committee’s agenda during a speech in Cape Town, South Africa, on Friday.

Mr. Ingves said he was looking forward to the results of a rigorous review of bank books by the European Central Bank, which will be completed by the end of the year. The so-called asset quality review is intended to expose bad loans or sour investments that banks may have been keeping hidden.

Among bankers and European politicians, there is profound nervousness about what the review might uncover, but Mr. Ingves said the reckoning was overdue.

“Europe will be better off dealing with the problems than hiding them,” he said. “There is not much of an upside to not wanting to know.”