The Basel Committee on Banking Supervision announced new, higher capital standards on Sunday that essentially boost minimum common equity requirements to 7% by Jan. 1, 2019.
The committee said banks must hold at least 4.5% of minimum common equity, but add an additional "conservation buffer" of 2.5% to withstand future periods of financial stress.
The agreement is expected to be approved by the G20 at its meeting in Seoul in November.
"The agreements reached today are a fundamental strengthening of global capital standards," said Jean-Claude Trichet, president of the European Central Bank and chairman of the Group of Governors and Heads of Supervision. "Their contribution to long term financial stability and growth will be substantial."
To be sure, the international agreement will be phased in over time and implemented differently in each country.
Specifically, the committee said that an additional countercyclical buffer between 0% to 2.5% of common equity or other loss-absorbing capital "will be implemented according to national circumstances."
"The purpose of the countercyclical buffer is to achieve the broader macroprudential goal of protecting the banking sector from periods of excess aggregate credit growth," the committee said. "For any given country, this buffer will only be in effect when there is excess credit growth that is resulting in a system wide build up of risk. The countercyclical buffer, when in effect, would be introduced as an extension of the conservation buffer range."
The capital agreements will be supplemented by a non-risk-based leverage ratio of 3%.
Banks have argued that if capital standards are set too high, it will spur a credit crunch. But regulators have said that if new requirements are phased in over time, it will mitigate any impact on lending.
Accordingly, the committee outlined a series of transitional arrangements for the new capital standards to ensure they do not damage the economy.
Regulators are required to have new rules in place by January 2013. The minimum common equity and Tier 1 requirements will be phased in over the next two years.
On Jan. 1, 2013, the common equity requirement will rise to 3.5% from 2%. In 2014, it will rise to 4% minimum common equity, with the final 4.5% taking effect in 2016. Similarly, Tier 1 requirements will be phased in over the same time period, rising to 4.5% in 2013, 5.5% a year later, and 6% in 2016.
The capital conservation buffer will be phased in between 2016 and 2018, becoming effective on Jan. 1, 2019. Starting on Jan. 1, 2016, banks will be required to hold 0.625% of risk-weighted assets as a buffer, increasing by gradual increments to 2.5% by 2019.
But the committee said individual countries could move quicker toward that goal.
"Countries that experience excessive credit growth should consider accelerating the build up of the capital conservation buffer and the countercyclical buffer," the panel said. "National authorities have the discretion to impose shorter transition periods and should do so when appropriate."