Stephen Blank
We spent the summer awaiting the decision of the Swiss-based Basel Committee on Banking Supervision regarding liquidity and capital reserve requirements intended to strengthen the global financial system and better prepare banks to survive future financial crises.
The core of the Basel III regulations is the requirement that banks maintain equity (or “Tier I Capital”) equal to 6.0 percent of total assets, an increase of 4.0 percent over current requirements. Banks must also maintain a capital conservation buffer equal to 2.5 percent, thereby providing an overall equity requirement of 8.5% of total assets. The new conservation buffer will not be fully in place until 2019. [Doesn’t it seem a little generous regarding the pace of implementation? Based on prior experience, we could have two financial crises between now and 2019.]
The U.S.’s largest banks—Bank of America, J.P. Morgan Chase, and Citigroup—appear to already meet the new requirements.
The Basel agreement also includes a global leverage ratio designed to cap the build-up of leverage in the banking sector on a global basis, thereby reducing the risk of precipitous deleveraging by financial institutions in the event of another financial crises.
The leaders of the G20 Group of countries are due to approve the regulation at their summit schedules for November in Korea.