New Basel Capital Accord Announced

Yesterday, the Bank for International Settlements announced that its Basel Committee on Bank Supervision has reached a preliminary agreement on a new capital accord widely known as Basel 3. Here is what the New York Times reported today.

Central bankers and regulators have reached an almost-unanimous preliminary agreement on new standards to reinforce the stability of the global financial system, adding to investor confidence in the outlook for many banks.

In the next few months, the regulators will conduct a detailed analysis of how the standards would affect the biggest banks in Europe, Asia and the United States. Under the plan, banks will have until as early as 2018 to comply with a requirement that they hold at least $3 in capital for every $100 they lend — a so-called leverage ratio of 3 percent. A leverage ratio is considered the broadest measure of a bank’s financial strength.

The regulators said the final amount might be adjusted. Whatever the amount, the requirement should have little effect on U.S. institutions, which already meet the 3 percent standard easily. Some European and Asian banks could have to reinforce their financial positions.

Like many movie sequels, this new capital accord is somewhat anticlimactic. An implementation period of seven years is the length of many business cycles and we will certainly see a need for adjustments to the capital accord by then. So, stay tuned for Basel 4.