Financial industry groups: Long transition to ease impact of global bank rules
Monday, September 13, 2010; 8:17 PM
Bank stocks rose and major financial industry groups generally welcomed new bank capital requirements, approved on Sunday by a Switzerland-based regulatory group, that called for tighter restrictions on financial firms but gave them an eight-year transition period before the rules take affect.
Critics cautioned, however, that the requirements adopted by the Basel Committee on Banking Supervision fall short of what's needed to prevent another financial crisis.
The committee, a group of central bankers and regulators charged with proposing ways to make the world financial system more stable, agreed that banks should roughly double the amount of capital they hold as a buffer against losses and made other recommendations aimed at helping banks survive the type of shock that sent the global economy into recession in 2008.
In Europe and the United States, financial industry groups said the new rules - which must still be adopted by individual countries - could force banks to shed assets or curb some types of lending to comply, but they said the long transition period would ease the impact.
"Implementation of the new requirements will pose challenges" for banks that fall short of the new standards, Charles Dallara, managing director of the Institute for International Finance, said in an e-mailed statement. But the impact "may be offset to a degree by the pragmatic agreement to phase-in the new measures over several years."
The institute had been among the most vocal of the financial industry groups that warned that earlier proposals by the Basel Committee might constrain lending and curb economic growth.
The plan approved Sunday attempted to balance those concerns while also addressing a disagreement between the United States and some European regulators over how strict the new rules should be and how quickly they should be implemented. In the end, a slower timetable was adopted.
Each country, for example, is being left to decide whether to force its banks to set aside even more capital in good times as a way to restrain lending and avoid the type of run-up in asset prices that can lead to a crash. Also, it has not been decided whether large firms that are heavily intertwined with the global financial system should set aside yet more money because of the broader risks they pose if they run into trouble.
The IMF has promoted both those steps, arguing they are crucial for making making the world financial system more stable.
"The cry was 'never again.' Well, you could have [a crisis] again based on this," said Morris Goldstein, a senior fellow at the Peterson Institute for International Economics. The central bankers and regulators in the committee "missed a historic opportunity."
The panel, representing 27 countries, includes Federal Reserve Chairman Ben S. Bernanke. In a statement Sunday, the committee said it would continue work on several outstanding issues, such as the proposed capital charges for larger banks.
The committee's proposals will be discussed by the Group of 20 major economic powers when they meet in South Korea in November. After that, the governments in major financial centers will have to translate the proposals into local rules and laws, a process likely to touch off a new round of lobbying over the details.
U.S. officials said the tenets of the Basel proposal could be met through new regulations from banking oversight agencies and would not require new legislation.
"The journey is just beginning, not ending," said Tim Ryan, chief executive of the Securities Industry and Financial Markets Association. "We are really not going to know the impact of Basel, Dodd-Frank and the related accounting changes for a couple of years."