Banks must hold a higher buffer of capital to a certain level in order to keep to European rules.

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New rules on bankers' bonuses and the amount of capital that banks must hold as a buffer have been approved by the European Parliament by a big majority.

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After all, through generous political giving and effective lobbying, Fannie and Freddie have managed to fend off attempts to force them to boost the capital they hold, their buffer against losses.

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Thirdly, banks are to hold a sufficient capital buffer - as outlined by global regulators - which means that if banks do fail, losses can be absorbed by shareholders and other creditors rather than the taxpayer.

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As part of the package of new standards, banks will be required to increase their minimum common equity requirement from 2% to 4.5%, and will additionally have to hold a capital conservation buffer of 2.5%, "to withstand future periods of stress, " the Basel Committee said in a press release.

FORBES

As well as increasing the capital banks hold to act as a buffer against future losses from 2% to 7%, Professor Cecchetti said Basel III had made the definition of what constitutes as capital stricter and widened the remit of what counts as banking activity.

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Now, I assume that someone has looked at this before, but this is roughly consistent with a corporations-hold-cash-as-a-buffer-between-revenues-and-costs model.

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The Basel Committee on Banking Supervision, which includes representatives from 27 countries, now wants banks to hold 4.5% common equity against assets plus another 2.5% buffer, for a total of 7%.

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