Panel plans future of finance, aiming for crisis-proof banking
The coterie of central bankers and government regulators gathering in the small Swiss city of Basel this weekend don’t know whether you’ll need to buy a car next year or borrow money to run a business.
But the new rules they have written over the last few months may well determine whether those loans can be made, how much they will cost – and perhaps how quickly the economy overall will expand.
While Congress and European parliaments have spent months in the limelight debating financial industry reforms, their work purposefully skirted several key questions: how much and what types of capital banks should be required to set aside as a cushion against possible losses, and what limits should be established to keep lending from getting out of hand as it did during the real estate boom.
Those issues – central to the supply of credit to households and businesses – have been taken up far from the public eye in a nondescript office building near the riverbanks of the Rhine. When officials such as Federal Reserve Chairman Ben Bernanke gather there today, they hope to put the final touches on proposals that will likely require banks to set aside potentially vast sums of new capital, keep more cash on hand to guard against bad times, and restrict lending if the economy appears to be growing too fast.
The aim is to create a crisis-proof banking system, immune to the boom-and-bust cycles that characterize the developed world economies. But while some of the principles are downright old-fashioned – that a bank’s owners, for instance, should have plenty of their own cash at risk as an incentive for good management, and that taxpayers should not bail out private companies – others move into uncharted territory.
In particular, instead of banks increasing their lending in good times to maximize their returns, the committee wants banks to tuck away more money during boom times, if government regulators determine that available credit is growing too fast. By applying the brakes, regulators would tighten credit for households and businesses and presumably discourage the sort of asset price bubbles that are typically followed by sharp downturns.
Any new standards adopted by the Basel Committee on Banking Supervision would still need approval of individual national governments.
The committee has been around since 1974, and currently has members from 27 nations, typically central bankers or top bank regulators. It has engineered two previous rounds of reforms aimed at steering the world’s major financial firms toward common standards. The group’s proposals are circulated online and public comments are accepted, but its work is not widely followed outside banking and finance circles.