BIS Cecchetti: banks hold too little capital and too little liquidity
05 October 2010
The short-term costs of the new Basel III capital standards are likely to be small and largely transient, while the benefits of a stronger and healthier financial system will be there for years to come.
Examination of the various proposals for strengthening regulatory standards for banks has focused, with good reason, on weighing their benefits and costs.
The new framework has three parts - a minimum, a conservation buffer and a countercyclical buffer - and is macroprudential in nature. That is, it reduces both the likelihood of excessive credit creation when times are good and the possibility of a credit crunch when times turn bad, reducing systemic risks that precipitate crises like the one we have just lived through.
The reforms are being introduced in a way that will not impede economic recovery, while providing necessary time for implementation in individual jurisdictions. In order to make sure the new framework is effective, we will need to make certain that it provides benefits to the system from day one, ensure that banks and the public sector are able to respond appropriately to shocks when they inevitably occur, and do more to address systemic risks contained outside traditional banks.
© BIS - Bank for International Settlements
