In Depth April 17, 2008, 5:00PM EST

How New Global Banking Rules Could Deepen the U.S. Crisis

by Peter Coy

James Victore

In 1999, in the aftermath of a financial crisis that spread from East Asia to Brazil, Russia, and beyond, the central bankers and finance ministers of 10 of the world's wealthiest nations sent their deputies to the tidy Swiss city of Basel. Their mission: to begin devising a set of improved banking regulations for their governments to adopt, with the hope of reducing the harm from future financial crises. The world's leading financial regulators labored together to strike a balance between ensuring banks' safety and giving them room to take risks and make money, finally in 2004 producing a recommended rulebook called Basel II. (Yes, there was a Basel I. More on that later.)

Now, as another financial crisis unfolds, it would seem that nations are adopting BaselII at just the right time. Europe and Japan have put it into practice over the past year, and the U.S. is set to phase in a modified version starting next year. The start date for American banks to begin submitting their plans for compliance to U.S. regulators was Apr. 1.

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