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New Global Banking Rules in the Works, 2 Years After Lehman’s Downfall

September 13, 2010 at 3:26 PM EDT
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JEFFREY BROWN: And we turn to the international banking system. Trouble in the past and prevention in the future.

It was a tense weekend two years ago when Wall Street investment giant Lehman Brothers teetered on the brink and then collapsed, helping to trigger a global financial crisis. No federal rescue came, a decision that fell to the nation’s top finance officials at the time: Treasury Secretary Henry Paulson, chairman of the Federal Reserve, Ben Bernanke, and Timothy Geithner, then president of the Federal Reserve Bank of New York, now President Obama’s Treasury secretary. In recent testimony before a commission investigating Lehman’s fall, Bernanke repeated what he had said in the past, that the Fed had lacked legal authority for a bailout.

BEN BERNANKE, chairman, Federal Reserve: The only way we could have saved Lehman would have been by breaking the law. And I’m not sure I’m willing to accept those consequences for the Federal Reserve and for our system of laws. I just don’t think that would be appropriate.

JEFFREY BROWN: But the Fed chairman also went further.

BEN BERNANKE: It wasn’t just a question of legality. It was a question of whether there was anything we could conceivably do that would prevent the failure of the firm. And therefore, it was with great reluctance and sadness that I conceded that there was no other option. There was never any discussion which says here’s how we can save Lehman, should we do it or not? We never had a discussion like that.

JEFFREY BROWN: Lehman’s collapse and the ensuing crisis led to a new push to make banks safer. In the U.S., a sweeping financial reform bill signed into law in July imposed stricter capital requirements on banks, yet largely left U.S. regulators to determine those levels. Now new international standards may be on the way.

This weekend in Basil, Switzerland, central bankers from 27 countries including Ben Bernanke agreed to new rules that include substantially raising the amount of capital that banks must hold in reserve. Banks in the U.S. currently must hold about two percent of their assets in capital or equity to absorb losses in the event of runs or financial panics. Under the so-called Basil III agreement, the new international standard would be seven percent of assets, but banks would have until 2019 to implement it. The head of the European Central Bank said the move would help protect against another meltdown.

JEAN-CLAUDE TRICHET, chairman, European Central Bank: What we have decided is commensurate to permit when we have all the standards in place to make the banking sector at a global level much more resilient. And I would say we think we are commensurate to the shocks that we might have to cope with.

JEFFREY BROWN: Some banks have said the new rules may force them to reduce lending, but U.S. officials favor going ahead with them. The agreement must still be ratified at the G-20 summit in November.