WASHINGTON - 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 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 Simon Johnston, the former chief economist of the International Monetary Fund, now a professor at the Massachusetts Institute of Technology.
According to Johnston, new rules should triple the amount of capital that banks need to hold in reserve.
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.