Sunday, June 26, 2011

"Too Big to Fail" Banks Required to Hold Increased Capital Reserves

The New York Times:
The chief oversight group of the Basel Committee on Banking Supervision proposed that the world’s largest and most complex banks would need to hold a reserve of high-quality capital of between 1 and 2.5 percent of their assets to cope with any unforeseen losses. That would be on top of their proposed minimum capital levels for all banks, currently set at 7 percent of assets.

In a statement Saturday, the panel of regulators said the new measures would create strong incentives for large banks to curb risky behavior that could endanger the financial system. “This will contribute to enhancing the resiliency of the banking system and help mitigate the wider spill-over risks,” said Nout Wellink, a central banker from the Netherlands who is chairman of the Basel Committee.
While this is a step in the right direction, in America, a re-imposition of the strictures of the Glass-Steagall act would be more appropriate.
The act introduced the separation of bank types according to their business (commercial and investment banking), and it founded the Federal Deposit Insurance Corporation (FDIC) for insuring bank deposits. The FDIC law was an amendment to the Federal Reserve Act, which was later withdrawn as part of this Glass–Steagall Act and Federal Reserve Act to become the Federal Deposit Insurance Act by decree in the Federal Deposit Insurance Act of 1950.
Forcing banks back into their corners would prevent episodes like we saw in the 2009 banking crisis.  From a 2010 Economix blog post,
For the second time in less than 80 years, the nation’s commercial banks are being told to stick to their knitting. Their knitting is taking deposits, handling checking accounts, lending money and managing the nation’s payment system. Twice now, they have ventured beyond these standard activities, gotten into trouble and almost brought down the financial system.

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