Basel Committee says banks need higher capital and dynamic provisioning

Basel II will embrace dynamic provisioning and higher capital, but not yet, says BIS

BASEL - The Basel Committee on Banking Supervision has said that banks need strengthened capital and elements of dynamic provisioning to better protect them as a lesson from the current crisis. Basel II has been widely criticised for encouraging pro-cyclicality, which dynamic provisioning is designed to offset.

A statement on the Bank for International Settlements' (BIS) website said: "This will be achieved by a combination of measures such as introducing standards to promote the build-up of capital buffers that can be drawn down in periods of stress, strengthening the quality of bank capital, improving the risk coverage of the capital framework and introducing a non-risk-based supplementary measure."

Minimum regulatory capital levels will be reviewed in 2010 "to arrive at a total level and quality of capital that is higher than the current Basel II framework". The BIS update is the result of a meeting held by the Basel Committee on Tuesday and Wednesday of this week (March 10 and 11).

The release said market reactions to capital levels had been "highly pro-cyclical" and the Basel Committee will not call for higher minimum capital levels until the worst of the crisis has subsided.