Central banks fear 'moral hazard'

Central bank governors reached agreement Saturday on measures to help reduce the "moral hazard" of major financial institutions, including raising loss absorbency requirements, a statement said.

Bank offices are seen in London's Canary Wharf district. Central bank governors reached agreement on measures to help reduce the "moral hazard" of major financial institutions, including raising loss absorbency requirements, a statement said.

The measures relating to so-called global systematically important banks will strengthen their resilience "and create strong incentives for them to reduce their systemic importance over time," the statement issued by the Bank for International Settlements said.
"The additional loss absorbency requirements are to be met with a progressive Common Equity Tier 1 (CET1) capital requirement ranging from 1% to 2.5%, depending on a bank?s systemic importance," the statement said.
"To provide a disincentive for banks facing the highest charge to increase materially their global systemic importance in the future, an additional 1% surcharge would be applied in such circumstances."
The measures were formulated by the Group of Governors and Heads of Supervision (GHOS), the oversight body of the Basel Committee on Banking Supervision (BCBS), the statement said.
"The GHOS is submitting this consultative document to the Financial Stability Board (FSB), which is coordinating the overall set of measures to reduce the moral hazard posed by global systemically important financial institutions.
"This package of measures will be issued for consultation around the end of July 2011."
The proposed yardsticks "include the methodology for assessing systemic importance, the additional required capital and the arrangements by which they will be phased in," the statement said.
The assessment methodology "is based on an indicator-based approach and comprises five broad categories: size, interconnectedness, lack of substitutability, global (cross-jurisdictional) activity and complexity."
The statement quoted European Central Bank chief Jean-Claude Trichet, the chairman of the GHOS, as saying that "the agreements reached today will help address the negative externalities and moral hazard posed by global systemically important banks."
The proposed new rules will run in parallel with the Basel III international regulations aimed at shoring up banks against future crises.
The 2007-2008 financial crisis forced many major economies to rescue their commercial banks, to prevent the biggest ones from failing and bringing down whole economies.
Regulators moved to toughen up capital requirements with the Basel III rules, although some banks have protested that they would be costly and harm the economy.