U.S. bankers want part of Basel plan dropped

By Reuters
Posted Sep. 10, 2010 at 2:52 p.m.

A leading U.S. banking group is urging Basel Committee negotiators working on new international capital standards to ditch part of their proposal.

The American Bankers Association said on Friday it opposes requiring financial institutions to build up their reserves when the economy is going strong so that they can better handle eventual downturns.

The proposal for a “counter-cyclical buffer,” being considered this week by banking regulators from 27 countries, duplicates existing regulatory powers, the ABA said.

The proposal would be difficult to implement, could lead to unintended consequences, and could “impose significant and unwarranted increases in the cost and permanent constraints on the supply of credit that would be a detriment to the broader economy,” the group said.

The ABA voiced its concern in a letter to members of the Basel Committee, the group of central bank and regulatory officials negotiating the new capital standards.

The committee is set to meet Sunday in the Swiss town of Basel to agree on tougher bank capital and liquidity standards. Leaders of the Group of 20 countries are expected to adopt the new standards at a meeting in November.

The idea behind a “counter-cyclical capital buffer” is that it can prevent the overheating of the economy during boom times while allowing banks to build up capital so they are in a better position to lend when a slowing economy needs a jolt.

In short, it is meant to help tame wild swings in the economy.

As a basis for determining when more capital should be held, negotiators have proposed looking at whether there is excessive credit levels in the broader economy in relation to economic output.

The ABA argued that the committee’s approach is rigid and could lead to a “one-size-fits-all” approach that punishes banks that take proper risk precautions.

“Prudent banks should not be penalized by the actions or inactions of those that do not adhere to equally high standard,” the group wrote.

The international banking community is closely watching the Basel negotiations and are worried that stricter capital requirements will cause industry profits to shrink and, in some cases, force banks to sell off pieces of their business.

The banking industry also contends that standards that are too strict will curtail the availability of credit, especially as the global economy is regaining its footing.

The lack of capital and liquidity is seen as one of the main causes of the financial crisis. Proponents of requiring banks to hold more and better-quality capital say such a move could prevent future calamities.


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