By Mark Williams
The opinions expressed are his own.
Events unfolding in Europe — including Greece, Portugal, Spain, Italy, and most recently Ireland — are alarming reminders that systemic risk is the most pressing of this decade.
While it’s been two years to this day since the death of Lehman Brothers almost brought down the entire financial system, global systemic risk — the chance that a single event or series of events can collapse the world financial system – remains quite high.
In response to this threat, international banking regulators just approved higher Basel III capital requirements as a step in reducing global systemic risk. Banks with more capital are being forced to make more room to absorb losses, helping to increase economic stability. Under this tougher standard, banks need to maintain a minimum tier one (core) capital ratio of 4.5 percent, more than double the previous requirement.
As further risk mitigation, dividend and discretionary bonus payments will be restricted unless core capital ratio is 7 percent or higher. Unfortunately the phase-in period for these stronger capital standards is from 2013 to 2019. So this multi-year time gap allows for plenty of systemic risk to persist and grow.
Domestically, the Dodd-Frank Act passed in July also attempts to address systemic risk by setting up a Financial Stability Oversight Counsel (FSOC) made up of major financial firefighters like the Fed, SEC, FDIC, and the Treasury. For the first time, managing systemic risk and its impact on the economy is an official U.S. regulatory policy.