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After listening to me natter on endlessly about the new Basel III capital requirements, I suppose you've all been waiting on the edge of your seats to see what the final agreement would be. Well, it arrived today. Here's the nickel summary:
I think you could make a good argument for even higher requirements than this, but this isn't bad. The new emphasis on core equity is welcome, as is the requirement for higher capital cushions in good times. This latter is something that can probably be gamed a bit depending on how lenient national regulators are, but it's a good idea anyway. The whole idea of minimum capital requirements is that it's something you should build up in good times in recognition of the fact that you're going to burn through some of it in bad times. As long as regulators don't define "bad times" too softly, it's a good idea.
The BIS press release also announced that a new liquidity coverage ratio and a revised net stable funding ratio will move toward minimum standards in 2018, but it didn't provide any details about exactly what the new standards would be.
Tim Geithner has said all along that he thought stronger capital requirements were the most important part of financial reform, and hopefully that means he'll be aggressive about pushing U.S. regulators to adopt the new standards. The United States never did adopt the Basel II standards, though it did independently adopt some of Basel II's worst aspects, including the ones that allowed banks to count some forms of contingent capital as Tier 1 capital. That turned out not to be quite as safe as everyone thought, which is why the Basel III emphasis on core equity is so important. Now it's implementation time.