World Panel Backs Rules to Avert Banking Crises

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World Panel Backs Rules to Avert Banking Crises

By JACK EWING

BASEL, Switzerland —Top central bankers and bank regulators agreed Sunday on far-reaching new rules for the global banking industry that are designed to avert future financial disasters, but could also dampen bank profits and strain weaker institutions.

Officials confirmed that the panel of financial authorities from 27 countries had reached agreement Sunday afternoon and would release details later Sunday. The group includes Ben S. Bernanke, chairman of the Federal Reserve, and Jean-Claude Trichet, president of the European Central Bank.

If ratified by the G-20 nations later this year, the rules, known as Basel III, will require banks to bolster the amount of low-risk assets they hold in reserve as a cushion against market shocks. While the American Bankers Association and other groups have complained about the provisions, other bankers said the rules will help avert crises of the kind that nearly plunged the world into depression in late 2008.

“Banks will unarguably be safer institutions,” said Anders Kvist, head of treasury at SEB, a bank based in Stockholm that has operations around Europe.

Analysts had expected the Basel group to sharply raise the most bulletproof category of reserves, known as core Tier 1 capital, to about 8 percent of bank assets from as little as 2 percent under current rules.

In addition, regulators were expected to oblige banks to raise their reserves even more during boom times, as insurance against a sudden market collapse. Banks would have to add an additional 3 percent of assets to their reserves, to a total of about 11 percent.

Some analysts predicted that banks might even be required to set aside as much as 16 percent in boom times.

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These were among the G-20 proposals.

Advance Tough New Financial Market Regulations: Following aggressive U.S. efforts to strengthen capital standards and compensation rules for companies receiving government support, the G-20 agreed to strong international standards for bank capital – calling on banks to hold more and higher quality capital -- and also agreed to strong international standards for compensation aimed at ending practices that lead to excessive risk-taking. Capital allows banks to withstand losses and is thus crucial to our efforts to help regulators hold banks accountable for the risks they take. These vital reforms were joined with steps to make the opaque over-thecounter (OTC) derivatives markets far more transparent; and procedures for managing the failure of large global financial firms. In each of these areas, the G-20 countries set out strict and precise timetables for reaching international agreement and then for implementing new standards nationally, promoting a regulatory race to the top. These rules will result in a financial system that looks far different from the one that led to this financial crisis, with more capacity to absorb losses and new incentives to avoid a return to past excesses. A return to reckless behavior and a lack of responsibility that led to the crisis will not be tolerated.

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They were also addressed in Wall Street Reform

- First off, this amendment makes it clear that bank holding companies follow capital rules that are at least as tough as those imposed on banks. This is the essence of the shadow banking problem: if you want to act like a bank you have to be regulated like a bank.

- This amendment also makes clear that if you are engaged in riskier activities than a bank, you must hold more capital. Examples it gives of risky activities are “(i) significant volumes of activity in derivatives, securitized products purchased and sold, financial guarantees purchased and sold, securities borrowing and lending, and repurchase agreements and reverse repurchase agreements.” You know, the things that caused the last crisis and could cause it all over again.

- This amendment also implies, in conjunction with the last paragraph, that banks will need to hold more capital when it comes to scope of businesses. The more high-risk business lines that a bank has, including ones that we can’t even think of yet, the more capital it has to hold. It tells the regulators that, when they aren’t certain, to require more capital.

- It also establishes “(A) the minimum ratios of tier 1 capital to average total assets, as established by the appropriate Federal banking agencies to apply to insured depository institutions under the prompt corrective action regulations…regardless of total consolidated asset size or foreign financial exposure.”

No more capital loopholes! No more playing BS games where a firm creates a trust and does financial engineering alchemy to pretend that debt is equity. Serious, quality capital is required for our largest and most systemically risky banks.

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Collins Amendment

The Collins Amendment, originally drafted by the FDIC staff and reflecting views held by Chairwoman Bair, imposes, over time, the leverage and risk-based standards currently applicable to U.S. insured depository institutions on U.S. bank holding companies, including U.S. intermediate holding companies of foreign banking organizations, thrift holding companies and systemically important nonbank financial companies. One of the effects of the Collins Amendment is to eliminate trust preferred securities as an element of Tier 1 capital. Implementing regulations must be issued no later than 18 months from the bill’s effective date. As with all changes in capital requirements, there are highly negotiated transition periods and grandfathering exemptions, which we describe below. Please see a more complete implementation timeline at the end of this memorandum.

The Collins Amendment also directs the appropriate federal banking supervisors, subject to Council recommendations, to develop capital requirements for all insured depository institutions, depository institution holding companies and systemically important nonbank financial companies to address systemically risky activities.

The Collins Amendment echoes changes that have been proposed but not yet been adopted by the Basel Committee on Banking Supervision in the so-called “Basel III” process and those that are contemplated in the new U.S. systemic risk regulatory regime.

The U.S. banking supervisors will have the unenviable task of implementing the intersection of Collins Amendment, Basel III, capital standards under the systemic risk regime, the requirement elsewhere in the bill to adopt countercyclical regulatory capital requirements and the capital requirements that will apply to the separately capitalized subsidiaries required for certain derivatives activities. However, at a minimum, the Collins Amendment will set a floor for the U.S. banking supervisors in the ongoing Basel III discussions.

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