Stricter Bank Regulation Likely, Following Mortgage Meltdown

Legislation & Lobbying

Stricter Bank Regulation Likely, Following Mortgage Meltdown

Posted Mar 4, 2008, 05:22 pm CDT
By Martha Neil

Next month, a limited phase-in of newly revised international banking standards known as "Basel II," after the Swiss city in which they were developed, is planned in the U.S. The revised rules call for financial institutions to be given more discretion to run their own businesses, because they are, in theory, in a better position to assess risks than government regulators.

But the turmoil in the U.S. mortgage market and a resulting worldwide credit crunch show that financial institutions, in practice, may not excel at evaluating banking risks after all. Hence, U.S. regulators are likely to put the brakes on the planned Basel II rollout, according to a page-one article in the Wall Street Journal (sub. req.).

"Did banks know how much risk they were taking? Did they know how much capital they needed to cushion them from sour loans? Did they prepare themselves adequately for the evaporation of 'liquidity,' or their ability to easily sell their securities or loans?

"The answer to all three questions appears to be 'no,' " the Wall Street Journal writes, predicting that the Senate Banking Committee would be making similar queries of banking regulators in a public hearing today.

Additional coverage of the hearing:

Associated Press: "Senators call for tighter bank standards"

Agence France-Presse: "Top Fed official warns more bank write-downs 'likely'"

Reuters: "Fed's Kohn: Fed should have better seen mortgage crisis"

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