Monday, September 13, 2010

New Basel Rules

True to their self-imposed schedule, the top central bankers and banking regulators have announced a deal on Basel III -- the latest step in the globalization of banking regulation.

Here's the official statement.

The statement attributes to Nout Wellink, president of the Netherlands Bank, the following sentiment: "The combination of a much stronger definition of capital, higher minimum requirements and the introduction of new capital buffers will ensure that banks are better able to withstand periods of economic and financial stress, therefore supporting economic growth."

The new capital requirements are summarized here.

The most relevant US officials are our Fed chairman, Ben Bernanke; our FDIC head, Sheila Bair; and the acting head of the Office of the Comptroller, John G. Walsh. Their agencies issued a joint statement praising the accord. "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," they said.

Aside from reserve numbers, the new rules have a feature known as the "countercyclical capital buffer." The idea here is that banks should have to have more capital when times are good than would be required of them in bad times. The extra "buffer" requirement is intended to dilute the booze at the party at times when credit is growing more quickly in a nation than is that same nation's underlying economy.

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