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A committee of central bankers and financial regulators have agreed new rules to prevent a repeat of the global financial crisis.
The Group of Governors and Heads of Supervision, the oversight body of the Basel Committee, on Sunday agreed to substantially raise the amount of capital that banks must set to aside against potential losses. Internationally active banks must now hold a minimum 7% of assets as common equity - significantly higher than the international standard of 2%.
If common equity levels fall below the minimum levels, regulators could force banks to hold back more of their earnings in reserves and suspend dividend payments and loan portfolios.
The rules will come into effect in 2013, by when banks are expected to set a minimum of 3.5% of assets aside as common equity, and will be gradually phased in over the next decade.
European Central Bank President Jean-Claude Trichet described the agreement as "a fundamental strengthening of global capital standards."
"Their contribution to long-term financial stability and growth will be substantial. The transition arrangements will enable banks to meet the new standards while supporting the economic recovery," he said.
The U.S. Federal Reserve welcomed the new rules as a "significant strengthening" in prudential standards for large and internationally active banks.
"The agreement represents a significant step forward in reducing the incidence and severity of future financial crises, providing for a more stable banking system that is less prone to excessive risk-taking, and better able to absorb losses while continuing to perform its essential function of providing credit to creditworthy households and businesses," it said.
The Basel Committee, which works under the Bank for International Settlements, now has to get the new rules ratified by leaders at the November G20 summit in Seoul.
Headquartered in Basel, Switzerland, the BIS was established in 1930 in the aftermath of the Great Depression and consists of members from central banks around the world.
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