Big Event in Basel

A major event for financial services companies across the globe is happening this weekend in Basel, Switzerland. Regulators from 27 countries are meeting there to finalize new rules that will impact how banks manage risk in the future.  Known as "Basel III", the new set of rules are a direct response to the financial crisis that began over two years ago.  The rules will take time to implement, but they are a significant shift from the Basel II Accord that allowed individual banks to determine their own capital levels based on their own internal rating system.  The Wall Street Journal reported the following today.

Convening in the Swiss city of Basel, the officials are hoping to cinch a deal this weekend. In one of the most far-reaching steps, the current proposal would require global banks to maintain basic levels of capital equal to at least 7% of their assets—much more than existing standards of roughly 4% for large U.S. banks.

The effort would transform banking, potentially forcing banks to take fewer risks, make less profit and face more government scrutiny. It comes nearly two years after the chaotic bankruptcy of Lehman Brothers convulsed the global economy and led to taxpayer-funded bailouts world-wide. U.S., European and Asian officials hope an accord will create new global standards designed to firm up the foundations of large international banks.

The hope of the Basel Committee on Banking Supervision is that the new rules will create a financial system that is more resilient and able to withstand future crises.  Only time will tell if this will be the case.

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.