October 19, 2010
Basel's Doing Nothing Wrong - But Is It Doing Enough?
Posted by David Zaring

The Basel Committee is revising the global banking standards, and really, there's not much to argue about, given the plan it has reported to the G20.  Here's what Basel wants:

  • higher quality of capital, with a focus on common equity, and higher levels of capital to ensure banks can better absorb the types of losses like those associated with this past crisis;
  • better coverage of risk, especially for capital market activities;
  • an internationally harmonised leverage ratio to constrain excessive risk taking and to serve as a backstop to the risk-based capital measure, with a view to migrating to a Pillar 1 treatment based on appropriate review and calibration;
  • capital buffers, which should be built up in good times so that they can be drawn down in periods of stress;
  • minimum global liquidity standards to improve banks' resilience to acute short term stress and to improve longer term funding; and 
  • stronger standards for supervision, public disclosures and risk management.

These agenda items aren't just globalspeak.  Leverage ratios, minimum liquidity standards, and capital buffers cost banks money, and make them safer, which means that it isn't easy to impose these rules on them.  The problem is, as I've discussed in a prior article, is that Basel can't really be trusted in a crisis, where it had, in the last one anyway, nothing to say.  Can it be trusted in a post-crisis?  It may be that Basel is a better rulemaker than a crisis responder.  But implementation is, as always with international efforts, the critical issue.

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