International banking regulators said Monday they reached broad agreement on the overarching principles that will shape capital requirements and liquidity rules for banks in the coming years.
The new agreement, which revises an earlier set of principles released by the Basel Committee on Banking Supervision in December 2009, tackles what banks can count as Tier 1 capital, including limits on mortgage servicing rights, deferred tax assets and minority interests.
The committee also endorsed contingent capital, a hybrid instrument that converts debt into equity under certain conditions, though it provided little detail on how such instruments are to be created.
Jean-Claude Trichet, president of the European Central Bank, said in a press release that the agreement will "strengthen banking sector resilience in a manner that reflects the key lessons of the crisis."
He said the reforms were "rigorous" and would promote stability in the banking system.
The committee will now turn its attention to putting into place a transition agreement to ensure the banking sector is able to support the economic recovery, Trichet said.
Among other things, the committee proposed testing a minimum leverage ratio of 3% for a trial period between 2013 until 2017 in order to assess how well it works. The cap could be effective as early as 2018. Such a level is less stringent than U.S. rules.
While the committee said there is broad consensus that the leverage ratio should be based on the new definition of Tier 1 capital, it is also weighing whether it should be based on either total capital or tangible common equity.
The group also delayed a one-year liquidity measure to study the issue further.
The committee outlined what can count as Tier 1 capital. It said that "significant" minority holdings in other banks, insurance firms or other financial firms may constitute up to 10% of Tier 1 common. Mortgage servicing rights and deferred tax assets may also each constitute up to 10% of Tier 1 common.
Overall, however, the committee placed a collective 15% limit on minority interests, deferred tax assets and mortgage servicing rights.
Some analysts said the proposal was better than the December 2009 agreement, but would still require banks to hold more capital.
"The changes disclosed today are broadly positive for big banks compared to the December 2009 proposal," Jaret Seiberg, an analyst with Concept Capital, said in a note to clients. "In general, it offers more leeway on bank capital and makes the short-term liquidity test less onerous."
But he said the changes should not be viewed as "benign."
"International regulators are moving to require banks to hold more capital and to be more liquid," he wrote. "These changes might moderate the original proposal, but they do not gut it. It is still a material boost from the status quo."
The Basel committee will release its economic impact assessment of their proposed capital and liquidity changes in August.
Later the committee will release results of another assessment that will look at the impact on the biggest banks from the proposed changes.