Bank watchdogs in Switzerland reached a “broad agreement” on new rules scheduled to take effect over the next decade.
The Basel Committee on capital and liquidity reform said its executive panel signed off on the design of its new regulations, including what constitutes capital. The committee expects to set final rules on the amount of capital banks will have to hold by year-end, in the culmination of what is being called Basel III.
“The reforms are rigorous and promote the long term stability of the banking system,” said Jean-Claude Trichet (right), the chairman of the oversight board and the president of the European Central Bank. “We will put in place transition arrangements that ensure the banking sector is able to support the economic recovery.”
The group said it will issue details on its capital and liquidity reforms later this year. Under the proposal, some of the changes will still be under study in 2017.
The shift in banking rules comes as major economies are struggling to come to grips with the costs of bailing out banks in the financial crisis of 2008.
A move to stronger capital standards should help stabilize the global financial system. Bankers are pushing the line that the overhaul will penalize economic growth. But after the last meltdown, that is a tradeoff many of us are willing to make.
“Unfortunately, enhanced safety will come at a cost, since it is expensive for banks to hold extra capital and to be more liquid,” said Douglas Elliott of the Brookings Institution. But assuming the costs aren’t too great, “it is worthwhile to give up a little economic growth in the average year in order to avoid these major impacts.”