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Only global banking regulations make sense now 2010-May-26 at 17:47 PDT

Posted by Scott Arbeit in Blog.
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4 comments

Regulators Seek Global Capital Rule, by Binyamin Appelbaum, 25-May-2010

Now one of the most consequential decisions about new restraints on the banking industry — how much more capital banks should hold in their rainy day reserves — is being decided not on Capitol Hill but far from Washington, by a committee based in Basel, Switzerland.

The Obama administration is pursuing an international agreement to make banks hold significantly larger reserves, which it regards as essential to increase the stability of the global financial system. It wants to complete the negotiations, which are being coordinated by the Basel Committee on Banking Supervision, by the end of the year.

Having tighter capital requirements only in the United States would drive investment to other places in the world through arbitrage.  The Obama Administration rightly now looks for a global consensus on a new, higher level of capital reserves for banks to prevent another global economic crisis like the one that we just experienced.

As you might imagine, the banks have reacted with shock and horror at the thought that they might need to be better capitalized:

Banks also warned that governments were piling on proposals to tax and constrain the beleaguered industry.

“The cumulative financial impact represents a level of conservatism so extreme that it will harm the banking sector, banking customers and national economies,” Wells Fargo’s chief financial officer, Howard I. Atkins, wrote in a letter to the committee.

If the “harm” is more security vs. slightly more profits for banks… I’ll take the security right now, thanks very much.

This process is inevitable after what we went through, and although I would have wished for it to be done already, it’s good that it’s moving through the system even within a few years of such systemic shock.