Increasing bank resilience and capital
G20 leaders have agreed that the core of financial reform rests in significantly increasing the quantity and quality of capital that banks hold to enable them to cope with market stress. Banks will have to build up more capital during times of prosperity to draw on in harder times, and improve their liquidity. An adequately capitalised banking system reduces risk to the sector at large and decreases the probability of severe financial stress.
This work is being undertaken by the G20 and Basel Committee, and will be taken forward through the implementation of the Capital Requirements Directive IV (CRD 4). CRD 4 seeks to:
- strengthen internationally agreed capital and liquidity requirements;
- prevent the build-up of too much leverage in the financial system (introducing a binding leverage ratio);
- address the credit risks posed by counterparties; and
- consider ‘counter-cyclical’ measures – these make better provision during economic prosperity for later weaknesses in the economic cycle.
Separately, the Financial Services Authority (FSA) launched a related UK consultation in July 2010, reflecting its plans to revise its Remuneration Code in line with the earlier Capital Requirements III Directive (CRD 3). Find out more about pay in the financial sector.
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