Banks should be pushed to meet the higher capital requirements before a series of deadlines starting in 2013, unless earlier introduction of the rules would threaten lending, the Bank for International Settlements says.
The Basel Committee on Banking Supervision's requirements, which will more than triple the core reserves that banks must hold to protect themselves from insolvency, are "the core regulatory response to problems revealed by the financial crisis", the BIS said in its annual report.
The stance of the group that acts as a bank for central banks echoes comments by Mervyn King, governor of the Bank of England, that UK lenders can do more than just follow the timetable for meeting the standards. "Countries should move faster if their banks are profitable and are able to apply the standards without having to restrict credit," the Basel, Switzerland-based BIS said.
National regulators should treat the rules, known as Basel III, as a "minimum" standard that they can surpass if they wish.
Global central bank governors agreed this weekend on extra capital rules for banks whose size or systemic importance means their failure could cause another financial crisis - a narrower set of institutions than those that will have to comply with Basel III.
Regulators agreed that as many as 30 of the world's largest lenders should face surcharges that range from 1 percentage point to as much as 2.5 percentage points of core capital to prevent them from causing another financial crisis.
The Basel III capital rules are scheduled to be phased in from 2013 through 2019. The BIS is the parent organisation of both the Basel committee and the Group of Governors and Heads of Supervision, which oversees the committee's work.
Under Basel III, banks will be obliged to hold core Tier 1 Capital equivalent to 7 per cent of their risk-weighted assets, compared with 2 per cent under the previous international rules.
As many as 30 of the world's largest banks will be required to hold the additional capital under the plans agreed on this weekend, meaning they may have to hold as much as 9.5 per cent in reserve.
UK banks can do more than just follow the timeframe for complying with Basel III, King said. "It would be better if they were slightly ahead of the schedule."
The Basel rules constitute minimum requirements that individual countries can exceed, the BIS said, mirroring calls by several European Union finance ministers, including George Osborne, that national regulators should be left free to toughen the rules for their banks.
That stance is in contrast to draft plans prepared by the European Commission for applying Basel III in Europe that would leave national regulators limited flexibility to add extra rules on a case by case basis.
"Delay or weakening of the agreements would jeopardise financial stability and the robustness of the recovery over the long term," the BIS said.
"The full, timely and consistent implementation of all relevant standards by banks, along with rigorous enforcement by supervisors, is critical."
The BIS also called for lenders to be forbidden from taking advantage of the 2013 through 2019 phase-in period for Basel III to increase dividend payments.
BANKERS WARN INVESTORS TO EXPECT LESS
Investors should prepare themselves for smaller profit margins as banks stash away more capital to avoid another global financial crisis, the world's major central bankers cautioned yesterday.
The Bank for International Settlements said new rules for banks to gradually increase their capital cushions would likely result in more predictable and smaller returns.
But the bank also said that bank managers and shareholders haven't adjusted expectations accordingly.
Jaime Caruana, the bank's general manager, said the global financial crisis of 2008-2009 still casts long shadows, but already there are signs of a return to excessive risk-taking. "While encouraging investors to take some risk was part of crisis management, there are signs that, in some areas, investors may be going too far again," he said.
The so-called Basel III rules for raising the amount of capital that banks are required to hold would cut into the money that banks can lend and invest, but are intended to improve their ability to withstand the blow if loans or investments go sour.
"Early action will reduce vulnerabilities ... and strengthen resistance, " Caruana said.