Basel, Switzerland is the site of the Bank of International Settlements (BIS) and where the new “Basel Accord” has recently been agreed upon. Increased capital standards in “Basel III” have been opposed by banks, but it appears as though most nations will go along with the proposed changes. While the BIS doesn’t really have the authority to pass banking regulation in any individual country, most countries that agree to Basel III will go along with most of the recommendations. Most of the recommended changes will not go into effect for between 5 and 9 years however, since the current recovery appears weak, and the ability to raise new capital is diminished.
One of the most important recommendations in Basel III is the increase to 7% of capital (WSJ article) required to offset potential losses. Many banks in the U.S. currently hold around 3 or 4% of the value of their assets in what is called “Tier I Capital.” Banks are also going to be expected to create a “countercyclical buffer” of capital which could be used during downturns to offset potential losses. Thus, banks would be required to hold more capital during good times than bad.
Back in May, the Economist published an article about how banks were fighting new regulations thought to be forthcoming in Basel (economist link or wiki link). While the banks might not have gotten everything they wanted, bank stocks generally rose upon the news of the delay in implementation.
- Do you believe that the banks will have any influence on when the “countercyclical trigger” gets pulled based on your insight on changes to the Basel agreement between May and September
- Do you believe that the economy will suffer either today or in the future because of more stringent capital requirements? Is it worth it to have a future restriction on the growth of global capital? Here you could see an article posted on Bloomberg.
- How do you believe other countries like China will play into banking when they are not part of the Basel agreements? Do you believe that China’s role will supersede any of the changes?