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BASEL, Switzerland (Reuters) - Global regulators, aiming to prevent any repeat of the international credit crisis, agreed on Sunday to force banks to more than triple the amount of top-quality capital they must hold in reserve.
The biggest change to global banking regulation in decades, known as "Basel III," will require banks to hold top-quality capital totalling 7 percent of their risk-bearing assets, up from just 2 percent under current rules.
The rules may oblige banks to raise hundreds of billions of dollars of fresh capital over the next decade. Germany's banking association, for example, has estimated its 10 biggest banks may need 105 billion euros (86.8 billion pounds) of additional capital.
But to ease the burden on banks and financial markets, regulators gave the banks transition periods to comply with the rules. These periods, extending in some cases to January 2019 or later, are longer than many bankers originally expected.
"The agreements reached today are a fundamental strengthening of global capital standards," European Central Bank President Jean-Claude Trichet said. "Their contribution to long-term financial stability and growth will be substantial."
Regulators hope the changes will push banks towards less risky business strategies and ensure they have enough reserves to withstand financial shocks without needing taxpayer bailouts.
But banks say the new requirements could reduce the amount of money they have available to lend out to companies, slowing economic growth in Europe and the United States as those regions recover from the credit crisis.
Under Basel III, banks will to hold top-quality capital -- known as "core Tier 1" capital, and consisting of equity or retained earnings -- worth at least 4.5 percent of assets.
They will also have to build a new, separate "capital conservation buffer" of common equity; this will be 2.5 percent of assets, bringing the total top-quality capital requirement to 7 percent. If they draw down the buffer, they will face curbs on the bonuses and dividends which they can pay out.
Another provision of Basel III, sharply criticised by some banks, will require them to build a separate "countercyclical buffer" of between zero and 2.5 percent when the credit markets are booming.
National regulators will decide when economies have entered such periods of "excess aggregate credit growth." They hope the buffer will slow lending when credit markets threaten to overheat, preventing dangerous bubbles from forming.
Although banks did not get their way on countercyclical buffers, they did appear to succeed in convincing regulators to provide generous transition periods.
The Tier 1 capital rule will take full effect from January 2015, with the capital conservation buffer phased in between January 2016 and January 2019. Some analysts said this showed regulators were caving in to the banks.
"The phasing-in period for the new capital requirements is surprisingly long, which will add to the scepticism about the robustness of the bank capital enhancement efforts," Mohamed El-Erian, co-chief investment officer of bond investment giant PIMCO, told Reuters.
The Basel III agreement was reached in Switzerland by central bank governors and top supervisors from 27 countries, after a year of horse-trading and lobbying that involved banks and governments seeking to protect their national interests.
Along with the capital standards, Basel III includes a range of reforms agreed earlier this year to reduce risk-taking by banks, including rules on how liquid banks' assets must be and how banks must treat tax assets on their books. Some changes were watered down in July after strenuous lobbying by banks.
After refusing in July to endorse draft Basel III rules, Germany won a key concession on Sunday, receiving a 10-year grace period from 2013 to phase out certain types of bank capital such as "silent participations," which are widely used by its state-backed banking sector but little used elsewhere.
Leaders of the Group of 20 leading countries, blaming the global credit crisis partly on risky trading by banks, called on regulators in 2009 to work on tougher bank capital rules. The G20 leaders are set to endorse Sunday's deal when they meet in Seoul in November.
Most of the world's top banks have to a large degree repaired their balance sheets since the crisis, so they are not expected to need to rush to raise funds in response to Basel III.
But Deutsche Bank, Germany's flagship lender, announced at the weekend that it planned to raise at least 9.8 billion euros to buy the rest of Deutsche Postbank. The fund-raising is seen partly as an effort to tap markets before any Basel-induced cash calls by other banks.
Additional reporting by Jennifer Ablan; Writing by Huw Jones; Editing by Andrew Torchia