More than 500 representatives from 27 nations met dozens of times this year to produce 440 pages of new rules to regulate banks in the world

More than 500 representatives from 27 nations, including top regulators and central bankers met dozens of times this year to produce 440 pages of new rules to regulate banks in the world.

What is not in the documents published by the Basel Committee on Banking Supervision, and escape hatches that are, may have more impact on how financial institutions operate after a global credit crisis that led to $ 1.8 billion dollars in bank losses and provisions.

most significant achievement of the commission, members said, an agreement to increase the amount of capital that banks must hold, I will not come into full force for eight years. Other measures that regulators had hoped would prevent future crises - the rules of liquidity, capital surcharge in most of the lenders and a mechanism for global solution for companies not - were postponed, allowing the banks to escape the harsh rules that would force them to change the way we do business.

"There will be changes, but no fundamental changes in the banking model," said Sheila Bair, who as U.S. president Federal Deposit Insurance Corp. is in the upper body of decisions of the Basel Committee. "We hope there will be some pressure for banks to become smaller and simpler."

Bair, 56, is one of five U.S. representatives on the board. She has attacked bankers for exaggerating the impact of the regulations provided in an effort to scare the public and politicians. In an interview in June, was asked "if regulators can put your trust in the industry analysis of the impact of proposals to strengthen capital standards."

Bank Lobbying

Banks conducted a campaign of one year to alleviate international standards, arguing that efforts to rein in lending to slow down and impede economic recovery. The lobbying effort was led by the Institute of International Finance, which represents more than 400 financial firms worldwide and is chaired by Josef Ackermann, chief executive of Deutsche Bank AG. Ackermann and other members of the IIF wrote hundreds of letters to the Basel Committee, met with regulators and went to the forums from Seoul to Washington.

In June, the group released a report that proposed capital rules would result in 9.7 million fewer jobs created and erasing a 3.1 percent global economic growth - estimated that the Basel Committee after challenge.

"There is no doubt that the increased costs to the banks core capital and financing will be largely over time, which inevitably will have a macroeconomic cost," said Ackermann, 62, when he presented the report .

Battle Lines

Banks also approached the home regulators, arguing that some rules would hurt them more than lenders in other countries. That helped draw the battle lines within the Basel Committee, according to an account pieced together from interviews with a half-dozen members who declined to be identified because the deliberations are not public. Germany, France and Japan led to pressure to soften the rules proposed last December and extending its application. The U.S., UK and Switzerland opposed to changes or delays.

The committee agreed in July to narrow the definition of what is considered the banking capital, focusing on common equity, which includes money received from sale of shares and retained earnings. During the crisis, other forms of capital allowed by the rules, such as the benefit of mortgage service and deferrals, offered no protection against losses. These are mostly not allowed by Basel III, as the rules published last week known.

Spain Change

Capital requirements could have been tighter if it were not for Greece. growing concern that the country would not be able to pay its debt, which culminated in a rescue plan by the EU in May and a rescue package of $ 1 billion for other Member States in need, darkened the prospects for recovery economic. That prompted some committee members to bend to pressure from the bank, according to policymakers, central bankers and others involved in the process.

In September, when the committee met to establish the real investment ratios, the U.S. was pushing to require banks to have common stock equivalent to 8 percent of risk weighted assets, the members said. He finished at 7 percent, after Canada changed sides at the meeting, tilting the balance towards the German camp. Canadian banks lobbied their regulators to reduce the relationship because they said they would be unfairly punished as healthy lenders that survived the crisis unscathed, told members.

Even after having been weakened, new relationships and definitions that require banks to have capital of $ 800 billion more, the committee said last week. Most lenders will raise the money by withholding benefits before the rules take effect.

Leverage Ratio

In addition to pushing for a higher capital ratio, Bair also called for an overall leverage ratio is to limit bank lending - something the U.S. has had on their books since 1980. In July, when the committee was debating how to define the capital, U.S. agreed to a relaxation in exchange for Germany and France to accept a leverage ratio, some members said.

Proponents of the leverage ratio, or equity as a percentage of liabilities, say it is an easier way to prevent lenders from becoming too indebted. Unlike capital ratios, which are based on risk weighting and can be manipulated, the leverage ratio has all assets, regardless of their risk.

The bankers can borrow more to maximize profit per share, a criterion for determining compensation. The more you borrow the higher the risk that a small decline in asset prices can wipe out the equity and make the bank insolvent.

No correlation

The Basel Committee has adopted a rule of 3 percent in July of leverage, which means that for every $ 3 of capital, a bank can borrow more than $ 97. While the figure is provisional and subject to revision before it enters into force, has since been attacked by banks in Europe and Asia, who say they restrict their ability to inhibit borrowing and lending.

The EU can not exclude the leverage ratio when it becomes law, the Basel rules next year. Several member countries have called for dropping the general rule, people close to the talks said last month. Most of the 27 EU countries oppose the adoption of the relationship, according to sources.

"The argument is that this will restrict lending - I hope our colleagues in Europe do not buy into this," Bair said in an interview earlier this month.

recent academic research supports Bair. A July paper by Jeremy Stein, professor of economics at Harvard University and two colleagues looked at data going back to the 1920s and found no correlation between higher capital ratios and more expensive to borrow from banks. A paper of October Anat Admati and three teachers at Stanford University found that higher levels of equity does not restrict lending.

"Fighting Continues'

"In the long term, the capital increase has little impact on the loans," Stein said in an interview. "But the banks do not like to go out and look. And regulators bought the banks' arguments in this regard. Could have been more difficult."

Bair, who first proposed the idea of a relationship of international influence in a speech to the committee members in Merida, Mexico, in 2006, said it still expects global adoption.

Barbara Matthews, director general of International Regulatory CBM Analytics LLC, a Washington-based company that advises on financial regulation, said the leverage ratio can not do at the end.

"Beyond meeting the definition of capital, nothing can be really count as having been reached," said Matthews, a former bank lobbyist, the Basel Committee's work this year. "There is further discussion on the schemes of liquidity and leverage. They are still too big to fail studying the problems, and may be too late to finish as events take care of them."

$ 6 billion

The Basel Committee, established in 1974, proposed level of liquidity in the first place, requiring that banks have enough cash or assets readily exchangeable to meet its obligations up to a year. Running out of cash was behind the 2008 collapse of Bear Stearns Cos. and Lehman Brothers Holdings Inc. in the U.S. and Northern Rock Plc in the UK

After the banks showed they would have to raise up to U.S. $ 6 billion in new long-term debt is satisfied, the commission postponed a final decision on the rule, the creation of an "observation period" of four to six years. Is likely to be revised, according to members.

"Liquidity is very important and remains an open question," said Douglas Elliott, a type of economics at Washington-based Brookings Institution and a former banker at JPMorgan Chase & Co.. "They're trying to do in the next two years but could take many years. O never do and if it is too controversial."

Resolution Mechanism

Lehman's collapse also showed the need to relax cross-border mechanism failed banks that have a global reach. More than 80 cases against the company, with the participation of hundreds of affiliates around the world have complicated the recovery by creditors and destroyed much of the value of their assets.

The FSB, which includes most members of the Basel Committee, as well as finance ministers from the Group of 20, struggled to reach a settlement mechanism this year. The FSB deferred a decision until next year after the divisions between the nations was too wide to bridge, members said. The group could not agree on how to distribute the losses among countries as a global bank is not and how different jurisdictions may recognize a single authority to pay creditors, members said.

Too big to fail

The FSB is also responsible for determining which banks are systemically important and the ability to impose additional capital requirements on them. The group may propose the establishment of national authorities for a resolution, rather than an international organization, members said. Instead of a comprehensive agreement on a surcharge for larger banks, you can suggest a menu of options.

"Nobody has been able to set too big to fail around the world because nobody knows how," said Hal Scott, a Harvard Law School professor who is also director of the Committee on Capital Markets Regulation, a group nonpartisan academics and business executives. "Even finding a way to solve the giant banks nationwide is difficult. How can you do it internationally? That was the biggest lesson of the crisis, systemic risk, but is still unresolved."

Many problems can not be said Frederick Cannon, co-director of research at Keefe, Bruyette & Woods Inc. in New York, a firm that specializes in financial firms. G-20 leaders meeting in Seoul last month sounded like they were claiming victory regulatory reforms, even if not completed, said Cannon.

"Before Seoul, I expected more reforms to be held next year," he said. "But now, increasingly, I think this is what we are getting, nothing more. They have a requirement to 7 percent of common shares - the rest is all uncertain to ever happen."

'Glass half full

Charles Goodhart, a former Bank of England policymaker and professor at the London School of Economics, said he is optimistic that the differences will be resolved in the coming years.

"There is still much to do, but we have not lost momentum," said Goodhart. "We're 50 percent of the way. We must see the glass as half full."

Bair, who is stepping down from his post when his term expires FDIC in June, said he hopes the reforms will continue after she leaves the Basel Committee. One of the challenges ahead, he said, is the reliance on banks' internal models to measure risk.

While smaller banks using standard risk-weighting prescribed by Basel, the largest banks use their own formulas to determine how much risk to allocate their assets in calculating capital ratios. This leads to wide variations in how risk-weighted assets are counted, said Bair.

"We must go beyond relying too heavily on internal models of banks, their own views on the risk," he said.