Global capital adequacy rules
What is at stake: Treasury Secretary Timothy Geithner sent a detailed letter to the G20 finance ministers calling for tough new capital rules for the world’s largest banks. Shortly after, the 27 central bank governors and bank supervisors of the world’s industrialised countries met to review a comprehensive set of measures to strengthen the regulation, […]
What is at stake: Treasury Secretary Timothy Geithner sent a detailed letter to the G20 finance ministers calling for tough new capital rules for the world’s largest banks. Shortly after, the 27 central bank governors and bank supervisors of the world’s industrialised countries met to review a comprehensive set of measures to strengthen the regulation, supervision and risk management of the banking sector in order to reduce the risk of future crises. Although they reached agreement on several key measures (raising the quality, consistency and transparency of the Tier 1 capital base; introducing a leverage ratio as a supplementary measure to the Basel II risk-based framework; introducing a minimum global standard for funding liquidity; …) questions remain around the size, the timing of implementation, and the impact of these measures.
Simon Johnson and James Kwak summarise and comment on Tim Geithner’s recent white paper on capital requirements. The paper makes a lot of points that are good – more capital is better, higher quality capital is better, risk weighting of assets should reflect risks accurately, and so on. But in this form the principles are too uncontroversial to have much in the way of teeth. Ultimately what will matter are the numbers – how much more capital will Tier 1 systemically important financial institutions have to hold – and how hard the administration will fight for real reform. One rule of thumb: if the banking lobby isn’t bitterly against it, it’s probably not enough.
Alan Blinder is worried that the will to reform the US financial sector is fading. There are several good candidates for explaining this fatigue, but one that seems perhaps worst to all is that it’s hard to keep the public engaged in something as complex, arcane and — frankly — as boring as financial regulation. Kenneth Rogoff also worries that the pulse of reform is faint despite the fact that we need to regulate the banks sooner, not later. According to him, too many policymakers, investors and economists have now taken the misguided view that everything would be fine if Hank Paulson, then US Treasury secretary, had simply underwritten a $50bn bail-out of Lehman and that the costs of greater bank regulation outweigh the benefits.
Eurointelligence reports the story that Josef Ackermann warned about an increase in lending costs as a direct consequence of the Basle proposals to tighten the capital requirement for quoted banks. Ackermann said that not enough economic studies had been made to assess the implication of this proposal, which only effects quotes, and which drives a wedge through between the different types of banks, in terms of their capital adequacy needs.
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