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Finance

Higher Safety Standards For Banks — Eventually

That big finance bill that passed Congress this summer left some key questions unanswered. Perhaps most important: How much money to banks have to hold in reserve as a safety cushion?

Yesterday, the answer to that question got a lot clearer. Top bank regulators from around the world agreed to a new set of rules that — eventually — will raise requirements for banks' safety cushions.

The rules were hammered out in Basel, Switzerland, and are known as Basel III.

There are lots of different ways to estimate the size of a bank's cushion. The new rules focus on what's called "common equity," which is how much money shareholders have invested in a bank's stock, plus profits that the bank holds onto (rather than paying them out as dividends).

Under the old rules, banks had to hold a common equity cushion equal to 2 percent of all of their assets (including the loans they make).

The new rules will raise the cushion to 7.5 percent — but the rules will be phased in over a long time. They'll start to take effect 2013, but won't fully kick in until 2019.

As it happens, most big banks in the U.S. and Europe have loaded up on common equity since the crisis, as fear has increased and appetite for risk has declined. So, for the most part, big banks already comply with the new requirements.

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For more:

  • Here's the official explanation of the new rules.
  • Bankers and regulators talk about how the rules get made — Planet Money podcast
  • The new rules may have broad ripple effects — WSJ
  • The world's biggest banks will likely be required to hold even more capital in reserve, though just how much remains unclear — Felix Salmon
  • Banks will have more time than expected to comply with the new rules — Bloomberg