BASEL, Switzerland — Stock markets cheered new regulations announced this weekend that were intended to prevent a recurrence of the financial crisis, but central bankers cautioned Monday that officials still must forge agreements to limit short-term bank risk and deal with institutions considered too big too fail.
“We have hard work to do still,” Jean-Claude Trichet, president of the European Central Bank, said during a news conference in Basel, where central bankers and bank regulators from 27 countries agreed Sunday to require banks to more than triple the amount of capital they held in reserve.
“It’s a work in progress on a large front,” said Mr. Trichet, who was chairman of the Basel group.
The group endorsed a plan to require banks to raise the amount of common equity they held, considered the least risky form of capital, to 7 percent of assets, from 2 percent. That requirement is the centerpiece of a host of new rules, most of which will be phased in through 2018, that are aimed at increasing banks’ ability to absorb market shocks.
But the authorities plan to develop additional rules that will apply to large, cross-border banks that can rock financial markets when they get in trouble — as happened when Lehman Brothers failed in September 2008. The investment bank’s collapse was instrumental in precipitating a global financial crisis that required billions in government bailouts.
“These institutions are still too big and interconnected to fail,” said Mario Draghi, governor of the Bank of Italy and chairman of an international panel that is working with Mr. Trichet’s group to determine how best to reduce risk to the financial system.
Mr. Draghi said that regulators needed to improve their capacity to “resolve the systemically important institutions without creating huge market disruptions and without dipping into the taxpayer purse.”
He said regulators needed to deal with the problem known as moral hazard, in which large institutions are tempted to take on too much risk because their executives believe that governments will always bail them out.
“The systemically important institutions will need enhanced supervision — supervision which is broader, more effective and more intrusive,” Mr. Draghi said. “The stakes are way higher than with a normal small or medium-sized bank.”
The Basel Committee on Banking Supervision, whose recommendations were endorsed Sunday by the central bankers and regulators, is also working on new rules intended to ensure that banks always have enough cash on hand to survive periods of market turmoil.
After Lehman’s failure, lending among banks seized up. Banks like Hypo Real Estate in Munich were unable to borrow the cash they needed for daily operations and did not have enough reserves to survive without taxpayer bailouts. German officials said Friday that they would supply an additional 40 billion euros in government guarantees for Hypo Real Estate, bringing the total to 142 billion euros, or $183 billion.
Still, shares of banking companies rose Monday as investors welcomed the agreement in Basel and expressed relief that banks would have plenty of time to adjust to the new rules. Investors may also have simply been relieved that the agreement provided more certainty about the shape of future regulation.
Analysts at Goldman Sachs calculated that only four of the 47 large publicly listed banks in Europe would fall below the new reserve targets in 2012. They are ATEbank in Greece and three Italian banks: Banco Popolare, Credito Valtellinese and Banca Monte dei Paschi di Siena.
But the analysts did not evaluate Germany’s savings banks and state-controlled landesbanks, Spanish thrift institutions and other banks that do not have publicly traded shares.
In addition, many banks may face investor pressure to raise their reserves well above the regulatory minimums. Analysts at Credit Suisse forecast Monday that 8 percent would become the working minimum of common equity, from an investor point of view, with 10 percent regarded as a comfortable level.
Analysts at Nomura Equity Research said they expected only a few weaker banks, like Crédit Agricole in France and Commerzbank in Germany, to take steps to raise additional capital.
Still, some banking groups continued to insist that the rules were too onerous and would throttle lending.
“We see a danger that German banks’ ability to issue credit could be significantly curtailed,” Karl-Heinz Boos, president of the Association of German Public Sector Banks, said Monday.
Mr. Boos said that lending to midsize businesses could suffer because the new rules would no longer allow the landesbanks to consider nonvoting shares as a form of common equity.
Asked about complaints from the banking industry, Mr. Draghi said, “I think this agreement has been welcomed by the markets.”
“By making the system more resilient,” he said, the rules “will support a sustained recovery.”
Source: New York Times