G20 will tell banks to save

Washington

Sept. 23: As the global economic storm abates, banks are being told to save more for the next potential deluge, a demand with striking consequences for the sector and the world’s economy.
At the G20 meeting in Pittsburgh later this week, leaders from the world’s largest economies will discuss new rules dictating how much banks must stash in their vaults versus the amount they are putting to work.
The fact that presidents and prime ministers will discuss apparent financial sector minutiae could be an indication of its importance across the economy.
“We just had a massive financial meltdown because banks did not have an equity cushion,” said Mr Simon Johnston, the former chief economist of the IMF, now a professor at the Massachusetts Institute of Technology. According to Mr Johnston, new rules should triple the amount of capital that banks need to hold in reserve.
Mr Johnston and others hope such tough rules would prevent a repeat of the current economic crisis, in which banks had woefully inadequate reserves to deal with a sharp drop in the value of their assets, in this case dodgy debt derivatives.
The resulting turmoil led to the collapse of Lehman Brothers and made borrowing difficult, stalling infrastructure projects, shuttering businesses and requiring governments to stump up trillions of dollars in bailout money.
But critics argue that a knee-jerk reaction could stall the economic recovery, and slash profit of the big four American banks by as much as 30 per cent, according to Wall Street Journal analysis.