Fed moves closer to adopting Basel III

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To make the economy more able to withstand a financial crisis, the Federal Reserve moved closer to adopting new international Basel III regulations over the weekend.

The regulations are primarily designed to ensure that banks are sufficiently capitalized to withstand a collapse without government assistance and mostly adhered to the policies that other international central banks are adopting.

To that effect, the Basel III rules stipulate that the largest banks have a capital level over 7% of their riskiest assets, 3 times the ratio required before the new regulations.     To give banks time to adjust their assets, the Basel III regulations will be phased in between January 2012 and January 2019.

Some institutions would struggle with the new requirement.   The largest 19 U.S.banks would have a capital shortfall of $50 billion, if the Basel III capital rules were to be made effective immediately.    Other smaller and mid-sized banks would cumulatively need to raise roughly $10 billion in capital to meet the new requirements.

Also, some banks have taken issue with the new regulation.   JPMorgan has led the charge, arguing that the housing market will suffer, as the regulations redefine many financial tools of the housing market as riskier than they were before.   This could deter banks from making home loans to riskier clients.

Also, many small banks argue that the regulations make them less competitive. Without the ability to take greater leverage and risks, smaller banks may be out-competed by banks with greater capital.

Regardless of the complaints, these regulations should have a muted effect, as they have been a long time coming and follow similar actions by Europe and Asia.   The US has been criticized, particularly by European policymakers, for being slow to draft their version of the regulations.

In addition, JPMorgan’s 2 billion dollar trading loss sparked arguments that banks are over-leveraged and undercapitalized.     The renewed effort to push Basel III regulation represents the Fed’s new focus on stability and regulation of financial markets.


Anna Timone (195 Posts)

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