The most important financial reform news of the year

Almost certainly, the most important and most underreported story of the day is the clenching of a deal at Basel III, the international conference of regulators tasked with establishing financial oversight standards for much of the world. 

The quick and dirty is this: Basel has adopted surprisingly strong capital requirements (the amount of money financial institutions need to keep on hand). That's a major victory for U.S. Treasury Secretary Timothy Geithner who faced opposition from many European countries. Given that the financial regulation bill passed by Congress earlier this year contained no hard capital requirements, this iteration of Basel is arguably a bigger achievement for supporters of stricter standards. 

Felix Salmon from Reuters explains the emerging deal: 

"Possibly the most important thing here is the existence of the first column, setting minimum standards for common equity -- which is also known as core Tier 1 capital. Such standards did exist in the past, but they were set extremely low, at just 2%, and so were generally ignored. As of now, common equity is the main thing that matters. No more throwing any old garbage into the Tier 1 bucket and calling it capital: the new standards for common equity are significantly tougher than the old standards for Tier 1 capital in total. The absolute bare minimum for core Tier 1 capital is 4.5%, and the new minimum for Tier 1 capital in general has now been raised to 6%. The minimum for Tier 2 remains at 8%. But that’s just the beginning."

If you understood that and want more, see Salmon's complete rundown here.

Americas-Europe/Russia: U.S. and Europe fighting over capital requirements in international banking regulations

Negotiators have made significant progress as the unofficial September deadline for the Basel III Accord nears. The accord consists of international recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision in Switzerland. The third of the Basel Accords is being written in response to the recent global financial crisis.

The current sticking point is over the amount of "safety capital" financial institutions should be required to maintain as a buffer for risk. Basel officials have recommended the level be set at 5% of assets, i.e., loans and investments, with an additional 2.5% buffer accessible to banks during periods of difficulty. 

A deal seems likely to conclude with the level set at 7 or 8% including the additional buffer. Since most U.S. firms already keep a larger percentage of safety capital on hand than most European banks, the new requirements are likely to be more onerous for the latter.

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