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Kai Ryssdal: Basel, Switzerland was the center of the banking universe this weekend. The subject at hand, something called “tier one capital requirements” — does not roll trippingly off the tongue. But normally strait-laced banking regulators are, relatively speaking, passionate about it. They say the agreement — known as Basel III to the in-crowd — might just be the most important thing yet to help avoid future crises. Banks are going to have to triple their reserves as a guard against loans going bad.
Our Washington bureau chief John Dimsdale reports.
John Dimsdale: By requiring banks to set aside $7 for every $100 they lend, regulators hope to even out the ups and downs of the banking economy. Some wanted an even fatter cushion.
Douglas Elliott of the Brooking Institution says 7 percent is watered down, but he understands why.
Douglas Elliott: There’s a really important trade-off here, which is we know requiring more capital makes banks safer, but it also makes it more expensive for them to lend. That hurts the economy. I’d have liked to see a little more safety purchased by a little less economic growth.
During boom times when lending is strong, banks will be required to build up their capital. That’ll help avoid bubbles when banks go after too many loans. And it sets aside money for a rainy day, says Accenture bank analyst Edwin van der Oudera.
Edwin van der Oudera: Clearly, in bad times it’s difficult to build up the cushion, because that’s when you need it. Therefore, they say banks should be asked to increase the size of cushion when things are going well, rather than just give all the money back to shareholders. And then they can start absorbing shocks gradually as they go during the bad times.
U.S. banks say they can live with the new capital requirements, since they already have, for the most part, built up that cushion. Scott Talbott is with the industry’s Financial Services Roundtable.
Scott Talbott: If you remember last year most U.S. banks went through a stress test with buffer capital requirements, so U.S. capital levels are high. European banks aren’t quite as high.
That vulnerability prompted Europe to demand that the capital requirements be phased in over eight years, which some criticize as too long. Still, the agreement is expected to be ratified by the leaders of the G-20 industrial countries when they meet next in November.
In Washington, I’m John Dimsdale for Marketplace.
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