Economy Watch: Banks Will Need Bigger Capital Cushions

Banks worldwide will eventually have to keep more capital under their mattresses, metaphorically speaking, under new rules published over the weekend by the Basel Committee on Banking Supervision, a group of regulators and central bankers who meet periodically in Switzerland.

September 13, 2010
By Dees Stribling, Contributing Editor

Courtesy Flickr Creative Commons user Annie Mole

Banks worldwide will eventually have to keep more capital under their mattresses, metaphorically speaking, under new rules published over the weekend by the Basel Committee on Banking Supervision, a group of regulators and central bankers who meet periodically in Switzerland (including Federal Reserve chairmen Ben Bernanke, who signed off on the deal). Under the new scheme, banks would have to hold capital equal to 7 percent of its assets — higher than the case in most countries, though some major U.S. banks have been edging toward that figure in the last two years.

The G20 counties are expected to ratify the deal later this year at a meeting in South Korea, and after that regulators in each country will be expected to implement the new rules. To avoid too radical a shift in financial policy during a time when the international economy is still wobbly, the capital requirements will likely be phased in.

As to be expected, banks are grumbling about the new rules, and have been postulating, as to be expected, the notion that the rules will eventually cost borrowers in terms of higher interest rates and more restrictive credit. Central banks and regulators, on the other hand, are saying that the new requirements are needed to prevent another 2008-style panic.

Dubai World Restructures Massive Debt

Dubai World, famed for developing memorably shaped manmade island properties off the coast of Dubai during the 2000s bubble years, has made a deal with its many creditors to restructure about $24.9 billion worth of debt. Though best known for those manmade islands, the state-run company actually has real estate interests worldwide, including a number of seaports, Barneys New York and even a part of Cirque du Soleil.

The company has been working on aligning some 73 creditors to its restructuring plan since March. The deal involves full repayment of the principal, but over a period of five- to eight years, and at interest rates generally below market rates (as low as 1 percent).

According to the International Monetary Fund, about $15.5 billion of Dubai World’s debt would have been due this year. The emirate’s debt problems began as the value of much of the real estate it controls cratered–sometimes as much as 50 percent down–in the wake of the worldwide recession.

ECRI Index Inches Up

It might not indicate a robust bounce-back for the economy, but the Economic Cycle Research Institute reported on Friday that its Weekly Leading Index rose to 122.0 in the week ended September 3, up from 120.5 the previous week, which was originally reported at 120.6.

That was the highest level for the index in more than a month; on August 6, it stood at 122.0. The ECRI, which is the private nonprofit organization that most economists look to for its determination of the beginning and end of a recession, some time ago declared that the U.S. economy started contracting in December 2007. With typically cautiousness, the ECRI has not (yet) declared when it thinks the economy started expanding.

Friday was a roller-coaster of a day for Wall Street, but the equities markets ended in positive territory when all was said and done. The Dow Jones Industrial Average gained 47.53 points, or 0.46 percent, while the S&P 500 was up 0.49 percent. The volatile Nasdaq ended up 0.28 percent.