- James I. Clark III
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Basel III Tightens Global Banking Standards
Global banking regulators have agreed to implement new rules that will make the international banking industry safer and avoid future financial meltdowns. Known as Basel III — after the Swiss city in which the agreement was worked out — the new requirements will more than triple the amount of capital that banks must have in reserves. This will oblige banks to be more conservative and compel them to maintain larger hedges against potential losses.
The heart of the agreement is a requirement that banks raise the amount of common equity they hold – perceived as the least risky form of capital – to seven percent of assets from just two percent. Banks are concerned that the tough new regulations will reduce profits, harm weaker institutions and increase the cost of borrowing money. To allay their concerns, regulators are giving the banks as long as 10 years to implement the toughest rules. Jean-Claude Trichet, president of the European Central Bank, said “The agreements reached today are a fundamental strengthening of global capital standards.” Representatives from 27 nations, who are members of the Basel Committee on Banking Supervision, participated. The committee’s recommendations are subject to approval in November by G-20 nations, including the United States. A deadline of January 1, 2013, was set to start phasing in the revised regulations.
Mary Frances Monroe, vice president for regulatory policy at the American Bankers Association – which represents the nation’s 8,000 banks – was happy with the results. “Banks understand the need for heightened prudential standards,” she said. The United States’ top banking regulators – the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency – issued a statement saying the agreement “represents a significant step forward in reducing the incidence and severity of future financial crises.”