Consumers were warned today that there would be no return to the era of cheap money after tough new regulations were drawn up to boost capital reserves held by banks.
Central bank bosses and regulators agreed rules last night which will force banks to more than double the spare cash they hold under new global regulations designed to prevent a repeat of the financial crisis.
The British Bankers’ Association (BBA) said the agreement was likely to see banks hike the cost of credit for borrowers, already hit with a lending clampdown since the credit crunch.
But European bank shares rose at this morning's opening while the euro rallied against the dollar as the prospect of a rush to raise cash receded.
On Dublin's ISEQ index, the Irish banking shares saw big gains, with AIB up over 6% to 79 cent, Bank of Ireland adding 3.6% to 70 cent and Irish Life and Permanent up 3% to €1.65 in early morning trade.
The new requirements will up the amount banks hold in common equity – the core Tier 1 ratio – from 2% to 4.5%, with a further “buffer” of 2.5%, bringing the total liquidity cushion to 7% of assets and liabilities.
Eleonore Lamberty, a credit expert at ING Bank, said: “Currently the majority of European banks will have no problem to meet the new requirements.
“For the handful of banks that would find it more difficult, the very lengthy implementation period ensures that any capital shortfalls can be addressed, possibly through retained earnings.”
The news spells bad news for consumers, according to Angela Knight, chief executive at the BBA.
She said the move would end of the “cheap money era” as it becomes more expensive to run a bank, which will in turn be passed on to consumers through higher loan and mortgage costs.
The new capital regulations will be phased in by 2015 through to 2018 following yesterday's agreement between central bankers and financial watchdogs made in the Swiss city of Basel.
In a joint release, regulators said the new “Basel III” rules would provide a “fundamental strengthening of global capital standards”.
Lord Turner, chairman of the Financial Services Authority (FSA), said the agreement amounted to “a major tightening of global capital standards” which would “play a significant role in creating a more resilient global banking system”.
He added: “The transition timescale will ensure that banking systems can play their role in supporting economic recovery.”
The requirements relating to common equity – seen to be the highest form of loss absorbing capital that banks hold – will be brought in by 2015.
The capital conservation buffer, which will serve to protect banks against a future unexpected downturn, will be in place by 2019.
This additional capital buffer will be built up in the good times and can be accessed by banks when times are harder, although they will have to restrict dividend payments in return.
There will also be a “counter-cyclical” buffer of up to 2.5%, which national regulators will be able to impose when they want to cool down overheating lending markets.
Low capital levels relative to assets and liabilities meant that many banks were vulnerable when the sub-prime crisis put stress on the overall financial system in 2007/08.
The statement from central bank governors and regulatory chiefs acknowledged that banks have made substantial efforts to raise their capital levels since that time.
But the regulators agreed the move as a further safeguard against a return to the conditions that led to the 2008 woes.
Nout Wellink, chairman of the Basel Committee on Banking Supervision and president of the Netherlands Bank, said: “The combination of a much stronger definition of new capital, higher minimum requirements and the introduction of new capital, higher minimum requirements and the introduction of new capital buffers will ensure that banks are better able to withstand periods of economic and financial stress, therefore supporting economic growth.”
News of a €10bn rights issue at Deutsche Bank yesterday sparked fears of a new wave of capital raisings by banks.
However, the mammoth cash call was partly made to fund a push into retail banking through a bigger stake in Postbank.
Ms Lamberty, of ING, said banks were unlikely to need to tap shareholders for more cash.
“The industry-wide expectation of significant capital-raising exercises has hereby become much less compelling,” she added.