Tricky lessons yet to be learnt by international regulators

The view from Wall Street
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The Independent Online

International regulators are yet to address fully the trickiest lessons of the credit crisis and the financial panic surrounding the collapse of Lehman Brothers two years ago this week, US bankers said, even as they gave a warm welcome to the new capital rules imposed under Basel III.

The higher capital requirements make it less likely that a major firm will reach the financial precipice as a result of an economic downturn, but the Bank for International Settlements and national regulators are still wrestling with how to stop the collapse of one institution from spreading through the financial system, as Lehman's did.

Talks on whether to force "systemically important" financial institutions to hold even more additional capital have not yet been concluded, and a banking sector backlash against new liquidity rules means further uncertainty.

The seizure of the credit markets meant even well-capitalised banks could not finance themselves during the panic in 2008, and Basel III imposes a requirement that banks hold 30-days' worth of funding in easy-to-sell assets such as government bonds. But traders have warned the rules could have unpredictable consequences for the capital markets, including the commercial paper market used by banks and firms for short-term funding. The BIS said there would be a four-year "observation period" during which it could alter the rules.

Bank of America and Wells Fargo, two of the largest banks in the US, were among those that said yesterday their institutions already met the capital standards of Basel III. Dick Bove, at Rochdale Securities, said 61 of 62 US banks with assets over $10bn (£6.48bn) already met the Basel III standards, giving them an international advantage.