“Massive softening of Basel bank rules” read the headline in the print edition of Monday’s Financial Times.
“Betrayed by Basel,” wrote Simon Johnson in a blistering post on his New York Times blog.
At issue was a rule called the liquidity coverage ratio promulgated by the Basel Committee on Banking Supervision. If you are a banking wonk, the headlines would have been enough, but in case you are among those who are hazy on just what the liquidity coverage ratio is, what the Basel Committee does, and why we should care, read on.
What is the Basel Committee?
Bank regulators of individual countries do not act alone in setting rules for bank capital. If they did, the result would all too likely be a race to the bottom in which each country tried to gain market share for its banks by issuing rules that were as lax as possible. In an attempt to prevent that from happening, the world’s bank regulators get together to coordinate regulations through the Basel Committee on Bank Supervision.
The Committee meets at the Bank for International Settlements, an international organization, founded in 1930,that fosters monetary and financial cooperation and acts as a bank for central banks. The Basel Committee periodically issues “accords” that set out international standards for bank capital, liquidity, and other aspects of bank operations. The first Basel Accords, now called Basel I, were issued in 1988. They were replaced by a new set of standards, Basel II, in 2004.
Unfortunately, Basel II did not prevent the most recent global financial crisis. Failure or near-failure of banks like Citibank, RBS, and Fortis required rescues and restructurings that ran to billions of dollars, pounds, and euros. It was back to the drawing boards to devise a new set of regulations. The world’s bank regulators agreed on the main outlines of Basel III at the end of 2010, but the technical details and the timing were left to be worked out later.
That is what all the fuss is about now.
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Edwin G. Dolan is an economist and educator with a Ph.D. from Yale University.
Early in his career, he was a member of the economics faculty at Dartmouth College, the University of Chicago, and George Mason University. From 1990 to 2001, he taught in Moscow, Russia, where he and his wife founded the American Institute of Business and Economics (AIBEc), an independent, not-for-profit MBA program.
Since 2001, he has taught at several universities in Europe, including Central European University in Budapest, the University of Economics in Prague, and the Stockholm School of Economics in Riga, where he has an ongoing annual visiting appointment. During breaks in his teaching career, he worked in Washington, D.C. as an economist for the Antitrust Division of the Department of Justice and as a regulatory analyst for the Interstate Commerce Commission, and later served a stint in Almaty as an adviser to the National Bank of Kazakhstan. When not lecturing abroad, he makes his home in Washington’s San Juan Islands.