New Rules Would Have Banks Set Aside More Capital

The world's largest banks have agreed to overhaul the way they do business. The new rules would require banks to bolster assets against debt and other investments, something that may cut into profits. Financial leaders reached the agreement at a meeting in Switzerland. The rules still need to be approved by G-20 nations.

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LINDA WERTHEIMER, Host:

It's Morning Edition from NPR News. I'm Linda Wertheimer.

STEVE INSKEEP, Host:

And I'm Steve Inskeep.

Banks around the world will face new, tougher rules in the coming years. Over the weekend, bankers and regulators from more than two dozen countries announced new banking standards. The countries involved include the United States. And the standards, which came out of a weekend meeting in Switzerland, are intended to prevent another global financial crisis. NPR economics correspondent John Ydstie has been following this story.

Good morning, John.

JOHN YDSTIE: Hi, Steve.

INSKEEP: So what's really changed here?

YDSTIE: Well, what these new rules do is to dictate the size of the capital cushion, the financial cushion that banks have to hold to cover their losses. They're really a key component of reform, because remember during the financial crisis governments had to step in and bailout banks who didn't have enough money in reserve to cover their losses.

So what the regulators, including Federal Reserve Chairman Ben Bernanke, agreed on was that banks needed to more than triple the size of that cushion, from just two percent to seven percent of all the loans and other assets they hold.

Another way of saying this is that banks now have to operate on just 93 percent borrowed money, instead of operating on 98 percent borrowed money, as the international rules allowed before the crisis. The U.S. had been interested in even tougher standards, but some European countries, including Germany, balked. So this is the compromise that they agreed on.

INSKEEP: So the idea, if I'm not mistaken, John, is that should banks write out another bunch of bad mortgages like they did a few years ago and lose a lot of money, they would at least have money to cover the losses. That's what you're saying?

YDSTIE: Exactly. That's right.

INSKEEP: Well, what do banks think about that?

YDSTIE: Well, the industry generally agrees that capital levels need to be higher. And in fact, most U.S. banks meet these levels already after being forced to beef up reserves after the financial crisis.

But some U.S. industry officials think seven percent is too high for the long term. They say basically that means banks will have to hold back money that they would have loaned out in order to build up the larger cushion against losses. And the bankers say that will hurt their profits. And they also say it will hurt the economy, because they'll be making fewer loans to consumers and businesses.

INSKEEP: OK. Could it hurt the economy?

YDSTIE: Well, you know, it could make loans marginally harder to get and raise interest rates a bit. That's one reason that the regulators decided to phase these new rules in over about eight years. By that time they hope our current economic troubles will be behind us.

And Steve, there's one other interested thing about these new standards. When the economy does get better and it's really humming along, regulators want banks to increase the capital levels even more, beyond seven percent. The idea is that they could tamp down bank lending during good times to keep bubbles from developing, like the housing bubble that got us into trouble two years ago.

INSKEEP: One other thing, John Ydstie. We mentioned that these come out of a meeting of many countries in Switzerland. Are these binding, these rules on the United States or does Congress have to approve? Do the Senate have to vote? What happens now?

YDSTIE: No, congressional approval isn't necessary. G20 leaders will likely give their approval to the new rules during their summit in November. And U.S. banking regulators - the Fed, the FDIC, the Comptroller of the Currency - will have to adopt them. And they'll do that through a ruling-making process that will probably take several months.

INSKEEP: OK. John, thanks very much.

YDSTIE: You're welcome, Steve.

INSKEEP: That's NPR economics correspondent John Ydstie.

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