By Howard Schneider
Washington Post Staff Write r
Saturday, September 11, 2010; 3:36 AM
The coterie of central bankers and government regulators gathering in the small Swiss city of Basel this weekend don't know whether you'll need to buy a car next year or borrow money to run a business.
But the new rules they have written over the last few months may well determine whether those loans can be made, how much they will cost - and perhaps how quickly the economy overall will expand.
While Congress and European parliaments have spent months in the limelight debating financial industry reforms, their work purposefully skirted several key questions: how much and what types of capital banks should be required to set aside as a cushion against possible losses, and what limits should be established to keep lending from getting out of hand as it did during the real estate boom.
Those issues - central to the supply of credit to households and businesses - have been taken up far from the public eye in a non-descript office building near the river banks of the Rhine. When officials such as Federal Reserve chairman Ben S. Bernanke gather there Sunday, they hope to put the final touches on proposals that will likely require banks to set aside potentially vast sums of new capital, keep more cash on hand to guard against bad times, and restrict lending if the economy appears to be growing too fast.
The aim is to create a crisis-proof banking system, immune to the boom-and-bust cycles that characterize the developed world economies. But while some of the principles are downright old-fashioned - that a bank's owners, for instance, should have plenty of their own cash at risk as an incentive for good management, and that taxpayers should not bail out private companies - others move into uncharted territory.
In particular, instead of banks increasing their lending in good times to maximize their returns, the committee wants banks to tuck away more money during boom times, if government regulators determine that available credit is growing too fast. By applying the brakes, regulators would tighten credit for households and businesses and presumably discourage the sort of asset price bubbles that are typically followed by sharp downturns.
The concept of smoothing out boom-and-bust cycles has become broadly popular. The International Monetary Fund has aggressively promoted it, and even bankers who'd be subject to the new restrictions say it makes sense. But on top of the other changes expected to be made as part of the "Basel III" regulations, bankers say they worry that a process meant to make the system safer could end up thwarting economic prosperity, precluding hundreds of billions of dollars in potential lending and, according to some estimates, cutting several percentage points off growth.
"If you are in a period of rising house prices and people feel wealth and want a loan and to participate in a boom and suddenly the regulator says, oops, this is above-average growth and we need to put a stamp on it - that is not the way to win first prize in a popularity contest," said Bernhard Speyer, head of banking and financial regulation for Deutsche Bank.
Any new standards adopted by the Basel Committee on Banking Supervision would still need approval of individual national governments.
U.S. officials will not comment publicly on the Basel deliberations, though Treasury Secretary Timothy F. Geithner has frequently said he regards higher bank capital standards as central to a less volatile financial system.
The Basel committee, chaired by Dutch central banker Nout Wellink, has issued its own analysis of its basic proposals and concludes that, far from crimping the economy, a more stable system would boost growth over time.
The competing studies have added to the uncertainty surrounding the decisions being made in Basel, a crossroads between France and Germany noted for its museums and local celebrities Roger Federer and Friedrich Nietzsche.
It was the run-up in U.S. home prices and mortgage lending - and the global crash that followed - that convinced the Basel Committee on Banking Supervision to take a hard look at the basic requirements for the post-crisis financial industry. The committee operates under the auspices of the Bank for International Settlements, an institution that clears transactions and operates as an intellectual and research hub for the world's central banks.
The committee has been around since 1974, and currently has members from 27 nations, typically central bankers or top bank regulators. It has engineered two previous rounds of reforms aimed at steering the world's major financial firms toward common standards. The group's proposals are circulated online and public comments are accepted, but its work is not widely followed outside banking and finance circles.
The next round of changes, however, promises to be more portentous.
The world's major financial centers now typically require banks to set aside an amount of capital equal to four percent of their total assets, which includes loans the banks have made. While details of the current proposal have not been released - and officials following the process in Switzerland say Sunday's meeting is "not a rubber stamp" - that baseline could jump to 7 percent, with additional amounts required for larger firms.
On top of the minimum capital levels would come the extra requirement during boom times and potentially other capital surcharges.
Banks that don't meet the standards might be forced to restrict their dividend payments or executive pay to amass more capital.
While many of the major banks in the U.S. and elsewhere are considered to be within reach of the Basel baseline, the other possible requirements have caused a heightened level of concern.
The Institute for International Finance, a trade group for banks and finance companies, has been the most vocal in arguing that the proposed rules, particularly some of the more untested ideas, could prove onerous.
The requirements would likely be phased in over several years, and assessments released by the Basel committee note that the proposed regulations have a flip side: just as capital standards increase during boom times, they would loosen during a downturn to encourage lending.
But even those who favor stricter capital requirements worry that the ideas being debated in Basel presume that government officials can accurately judge when an economy - or available credit, or asset prices - is growing too fast or too slow.
"At the household level, you have to recognize that credit is not going to be as available or cheap as it was before. That is a positive thing," said Craig Alexander, chief economist at TD Bank, a Canadian institution that, like others in the country, skirted the worst of the crisis because of Canada's more conservative home lending practices.
But Alexander said there may be ways for banks to keep fueling asset prices even if capital standards increase, and little incentive to lend in a money-losing downturn even if capital standards are lowered.
"Do regulators actually get the gauge right? What is excessive and what is not? How do you know a bubble until it bursts?"