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G-20 Punts on Uniform Implementation of Capital Requirements

by Craig A. Martin
Eyes On Wall Street |

The G-20,an international group of banking policy makers, have elected to delay the adoption of a uniform set of banking regulations requiring member nation banks to hold more capital-measures necessary to forestall the kind of bank runs that recently brought down several finance sector giants. This new set of banking regulations is designed to increase banks' capital and liquid assets, improving their ability to absorb losses and to weather severe short-term market declines. However, the G-20 avoided issuing a mandate that would have required uniform adoption of the new capital requirements by the end of 2012. Instead, the G-20 committed to permitting countries to phase in the adoption of these new capital requirements.

By permitting a transitional period for the adoption of a new set of capital requirements, the G-20 enabled member nation banks to hold different levels of capital and liquid assets. This approach poses risks to investors everywhere. As seen in the recent financial crisis, risk migrates to the path of least resistance. In light of the G-20's delay, banks can be expected to shift risk to offshore entities in countries that have yet to adopt the more stringent capital and liquid asset requirements prescribed by the G-20. Until all countries fully implement the G-20's capital requirements, investors are still exposed to significant losses as banks, instead of mitigating risk, shift exposure to countries with less onerous capital requirements.