two steps forward (and, so far, no steps backward)

Regulators have now agreed at least a few rules that will help prevent another bubble similar to the one whose burst-effects we all suffer at present

Last weekend the G20 agreed on proposals that have now been given shape by regulators at Basel. The new rules will force banks to improve the quality and extent of the capital buffers they hold to absorb shocks such as the ones that led to the bursting of the bubble.

Moreover there are now going to be limits on how much banks can borrow. Wheter these are adequate remains a moot point: the ceiling on borrowings is likely to be 25 times assets.

In my view, this is too huge a multiple. The parallel would be if a company with assets of 1 billion, could borrow 25 billion. Or if you as a private individual with assets (perhaps a house) worth 1 million could borrow 25 million. If such a proportion is preposterous for individuals and for companies, it is equally preposterous for banks.

However, it is certainly better than the previous situation where banks could borrow an unlimited amount, at least in theory. And 25x may be the most that regulators can achieve at present without upsetting the global economy too much.

In any case, the unfortunate result is going to be even less lending by banks! At least for the time being. And therefore an even longer recession.

But that relatively short-term cost is worth paying: if the soundness of banks improves, they will run into trouble less often and will therefore need to be rescued by taxpayers less often - and the fortunes of the global economy will be smoother as a result.

One other piece of progress is that bank supervisors can now limit, in good times, how much banks pay out to shareholders. That will enable and indeed force banks to build “counter-cyclical” buffers for bad times.

Isn't it a sign of our degenerate age that such commonsensical activity as saving for a rainy day (which every individual surely should try to practice without being forced to do so!) needs legislation?

Naturally, these (and other rules which will come into play soon) will make banks less attractive to investors interested in quick and high returns.

Equally, however, this will make banks MORE attractive as more reliable and secure long-term investments.

The precise rules are still being formulated and the Basel committee is expected to publicise concrete proposals by the end of the year and adjust them by the end of 2010 after carrying out an impact assessment. Expect people who have their eye fixed on short-term profits (whatever the cost to the rest of the world) to lobby fiercely against the letter as well as the spirit of such rules. Sphere: Related Content