Wednesday, October 18th, 2017

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Financial Sector Faces Higher Costs With New Capital Standards

The Basel Comittee plans to impose higher capital requirements on banks.Even since the economic crisis in 2008, the financial sector has still appeared as one of the most profitable industries in the U.S. The sector could see a small downturn in coming years, however, as The Wall Street Journal reports regulators are likely to impose stricter risk management rules for big banks.

The Basel Committee on Banking Supervision brings together some of the largest regulators in the financial sector. The group's Basel II accord sets the standard for how much capital banks should hold in reserve, with the current number at 7 percent disregarding certain seasonal fluctuations.

The committee has been negotiating the terms of the new Basel III regulation and it proposed in July an increase in base capital standards ranging between 1 and 2.5 percent for the largest banks.

"The logic behind the SIFI surcharge is that the failure of a systemically important institution would generate a very large shock to the rest of the financial system," William Dudley, president of the Federal Reserve Bank of New York, told the Journal. "It makes sense to require higher capital for such firms to reduce their probability of failure."

Nevertheless, banks worry that the higher capital standards could force them to change business models to maintain their current profit levels. Some argue that the move will not actually add to the stability of the system either, instead pushing more money toward less-regulated sectors.

Some European legislators have suggested easing the standards for the quality of capital held in reserve to reduce the burdens on banks, according to Reuters.

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