How New Global Banking Rules Could Deepen the U.S. Crisis

[jeffrey]

In 1999, in the aftermath of a financial crisis that spread from East Asia to Brazil, Russia, and beyond, the central bankers and finance ministers of 10 of the world's wealthiest nations sent their deputies to the tidy Swiss city of Basel. Their mission: to begin devising a set of improved banking regulations for their governments to adopt, with the hope of reducing the harm from future financial crises. The world's leading financial regulators labored together to strike a balance between ensuring banks' safety and giving them room to take risks and make money, finally in 2004 producing a recommended rulebook called Basel II. (Yes, there was a Basel I. More on that later.)...

Here's the problem. Today, many banks already face so many risks that implementing Basel II as written will put them in a capital squeeze. They will either have to reduce risk by cutting back on lending, or sell more shares to give themselves a bigger capital buffer, or both. If the banks do lend less, it could cause an even steeper economic decline, which would lead to more defaults and cause banks to ratchet back even more, and so on in a downward spiral.

How New Global Banking Rules Could Deepen the U.S. Crisis