Regulations good for banks

On Sunday, The Group of Twenty (G-20) Finance Ministers and Central Bank Governors, a international cooperative body aimed at addressing global financial issues, met in Basel, Switzerland, to discuss banking reform.

The meeting ended with the creation of Basel III, a deal requiring banks to keep higher capital reserves, which is meant to prevent a repeat of the high-risk lending that characterized the recent economic recession.

The deal coincides with other initiatives of the G-20 and U.S. legislators. It’s important and necessary for the global banking community and U.S. regulators to continue to work toward oversight and, if necessary, intervention that will force banks to act responsibly.

Although the banks themselves are private enterprises, their success or failure has a cascading effect on the entire U.S. economy, social stability, security and overall life-satisfaction of all U.S. citizens.

In 2008, the Troubled Assets Relief Program spent around $700 billion of taxpayer dollars to keep major banks viable, such as Bank of America, Citigroup, Goldman-Sachs, Wells Fargo and SunTrust, among dozens of others.

The debate over the wisdom of the bailouts is political, but the financial recklessness that brought it about illustrates the need for increased financial regulations, and has weakened arguments against them.

Contemporary society already has many financial regulations that are unquestionable. For example, laws are in place to prevent the monopolization of a particular industry by one company, which could lead to disastrous and abusive price gouging.

President Barack Obama’s administration has already targeted questionable banking practices with the passing of legislation in July to increase federal oversight and regulation.

Basel III will take effect toward the end of 2012 and will take several years to implement because it’s aimed at reducing an immediate impact too difficult for banks to adjust to during the economic recovery.

Under the regulations, banks will have to hold more common equity, which would allow for a higher tolerance for financial losses. The previous rate of only 2 percent for investments and loans will be raised to 7 percent.

According to BBC, bigger banks would be required to hold even more capital, and those who do not comply or fall below the necessary levels would have to restrict their ability to pay dividends and bonuses.

The G-20 has also passed recent financial regulations ranging from accounting to hedge funds.

The new regulations are a hopeful sign of a more realistic approach to checking banks, which are often more concerned about the short-term bottom line than long-term sustainability.

The banking sector is the backbone of the U.S. Therefore, it’s important that it falls under the regulations of its democratic government, as the welfare of the entire society is dependent upon it.