Basel Committee reaches agreement on bank rules
Tuesday, July 27, 2010
A panel of world financial officials has reached "broad agreement" on new rules to govern the global banking system but has postponed some key elements for as long as seven years while the impact is studied, the Switzerland-based group said Monday.
The group includes representatives of the world's major central banks, including the Federal Reserve, and the accord marks an important step forward in efforts to build a system less susceptible to the sort of shocks that occurred during the recent financial crisis and more able to weather any downturn.
The aim is to create common standards to be applied in all banking centers, and to do so by the time the world's major nations gather in South Korea in November for their next summit.
Monday's agreement is "a landmark" toward that end, said European Central Bank President Jean-Claude Trichet, chairman of the group of central bankers and regulators who form the Basel Committee on Banking Supervision.
The panel has not reached agreement on some of the most important and sensitive issues -- notably how much capital banks are going to be asked to hold and the degree to which they will be required to hold it in the form of common equity, considered the best buffer against a downturn. Those issues remain under discussion amid both protest from the banking industry that strict new standards will crimp economic growth and division between the United States and Europe over how tough new capital standards should be. European banks have traditionally relied less on common equity, while the United States and some Asian nations want banks globally to have enough highly liquid assets on hand to withstand a shock at least as great as the one experienced in the recent crisis.
Still, Monday's announcement represents progress in what has been a complex discussion that attempts to mold regulatory principles that can be applied to banks and banking systems in a broad variety of nations. The committee includes representatives from 27 nations, and all but one -- Germany, according to news reports from Europe -- agreed to the new provisions.
The panel agreed, for example, to allow a larger variety of assets to be counted as the highest-quality capital, which will make it easier for some European firms to meet new capital requirements.
It also agreed that large, highly connected companies -- those considered "too big to fail" -- be subject to capital surcharges and other provisions so they are better protected in the event of a downturn.
Some of the group's more controversial ideas -- such as forcing some banks to rely more on long-term sources of funding or adhere to new limits on lending -- remain in the plan but will be implemented during a transition period of as long as seven years.
In a study of the Basel process, Brookings Institution fellow Douglas Elliott said the trade-offs being negotiated by the panel are clear: financial stability vs. more expensive credit, as banks are forced to raise and hold more capital in relation to the loans they make.
"Newly toughened capital and liquidity requirements should make national financial systems -- and indeed the global financial system -- safer," Elliott wrote. "Unfortunately, enhanced safety will come at a cost. . . . It is beyond serious dispute that loans and other banking services will become more expensive and harder to obtain."
Monday's announcement was "good on both timing and on the maintenance of the basic integrity of a globally negotiated, harmonized increase in capital and liquidity requirement," he said.