Must-know: The current state of banking regulation in the US

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Sep. 10 2014, Updated 1:00 p.m. ET

Basel norms

The subprime again brought the banking regulations to a sharp focus. It was argued that the regulations weren’t able to prevent the crisis from happening. Currently, the banking regulations in the U.S. are shaped by the Basel norms.

Basel banking norms are global banking norms set by the Basel Committee on Banking Supervision (or BCBS), which is part of the Bank for International Settlements (or BIS). The BIS is a bank of the world’s central banks.

The need for such a regulation was felt after the increasing internationalization of the banking system. The current Basel norms in effect in the U.S. are Basel III norms.

The Federal Reserve and other regulators have already held discussions with banks across the U.S. The banks have agreed to implement Basel III norms in a phase-wise manner from the start of this year. These norms are to be implemented in a sequential manner in a five-year timeline ending in 2019.

Besides the existing capital requirements, Basel III norms intend to further strengthen the banking sector by having a 2.5% capital conservation buffer (or CCB). CCB is a buffer that banks accumulate in good times to tide over bad times.

It also introduces the concept of countercyclical buffer. Countercyclical buffer is increasing capital requirements in good times so that when the economic cycle turns bad, the banks are adequately capitalized.

You may have questions about Basel because we have covered it briefly here. But we’ll have a separate series on Basel for you.

All U.S. banks such as JPMorgan (JPM), Wells Fargo (WFC), Citibank (C), Bank of America (BAC), and other banks that are part of an ETF like the Financial Select Sector SPDR Fund (XLF) will become stronger because of Basel III norms.

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