Some thoughts on new international bank regulations...

Less than a week apart, the month September contains the anniversaries of two of the events that have shaped the post-millennium world.
The first, of course, is the terrorist attacks of September 11, 2001 on the World Trade Center. But while America mourned lost loved ones, paid tribute to fallen heroes and debated the building of a mosque near the former site, bank regulators from around the world met in Basel, Switzerland to discuss their strategy to prevent large international financial firms from filing for bankruptcy and destabilizing the global economy as Lehman Brothers' did on September 15, 2008.

The effect of the Lehman Brothers’ bankruptcy is still evident two years later, according to an article in yesterday’s Wall Street Journal. In a “Post-Lehman World,” as the article is titled, the picture for market, particularly in financial stocks, is weak. The Dow Jones Industrial Average is still down 900 points and U.S. financial stocks down a 31 percent in the past two years. In an article about proposed international regulations published in yesterday’s paper, The New York Times also mentioned the bankruptcy of Lehman Brothers, noting that it “set off a worldwide banking crisis that required billions in government bailouts.” (full article can be accessed at: http://www.nytimes.com/2010/09/13/business/global/13bank.html?ref=todayspaper).

In an effort to improve the stability of the global economy, the group at Basel agreed to require banks increase their levels of capital to about 7 percent of their assets, up from 2 percent. The capital could be used during rougher periods, so the banks could continue lending, but they would face consequences, particularly if the capital fell below a certain level. The idea is to discourage banks from taking on more risks than they can handle and requiring them to create a large safety net for economic downturns.
The Wall Street Journal, New York Times and Reuters all reported that these new regulations could cause an increase in interest rates, possibly even tighten the credit market. In an economy where credit is tight, and U.S. banks, anxiously waiting to see how the reform act in the United States will play out, are cautious in lending, to impose new regulations that could lead to a long term increase in interest rates, seems counter intuitive.

But the regulations are not set to be fully in effect until as late as 2018. While the current economic situation remains bleak, with house prices still falling and federal incentives to buy expiring, it’s hard to imagine when things will get better. But if the U.S and global economies do not improve with in the next eight years, it is even harder to imagine these regulations will make the situation that much worse. What is more likely is the economy will recover and perhaps a future where the credit market is tighter would better serve the global economy by preventing both borrowers and the banks that fund them from biting off more than then can handle.
In the nine years since September 11, there is still controversy over what is appropriate near the site and on the very site itself. Hopefully, by the time regulations are in full affect, around the 10th anniversary of Lehman Brothers’, the global financial system will not be a metaphoric “hole in the ground,” and there is something stronger in it's place.