On Sept. 12, after months of negotiations, the Basel Committee on Banking Supervision, a historically low-profile international institution, announced that its participants had agreedto new international minimum capital standards for banks. Scheduled to be phased in carefully over the next eight years, the new agreement -- informally referred to as Basel III -- represents the most significant set of international financial regulations to emerge since the onset of the global financial crisis. Yet, to succeed, Basel III depends entirely on national governments voluntarily following through on implementing and maintaining the new standards. As a result, distributional consequences across countries and the lack of an enforcement mechanism threaten the nascent agreement's prospects. 

The Basel Committee, comprised of the central bank governors of 27 major economies, including the entire G-20, crafts international banking standards and guidelines that member countries are expected to implement individually. The new agreement more than doubles the previous international standard for capital adequacy requirements -- or the amount of capital banks need to hold in relation to outstanding loans -- to 7 percent. The new framework will be presented at the November G-20 summit in Seoul, South Korea, where endorsement is expected. 

Requiring banks to keep more cash on hand is intended to have at least two stabilizing effects. First, it will increase the likelihood that they remain liquid enough to cover losses when investments do not pay off, theoretically reducing the likelihood of future system-wide government bail-outs. Second, it should modestly limit high-risk lending. 

In terms of its impact on the global economic recovery, Basel III may limit global outputslightly in the short term, but the agreement was designed for its long-term benefits. The Bank of International Settlements, another international central banking institution that advised the Basel Committee, found that even if Basel III does stunt near-term growth, it should improve long-term growth by reducing the occurrence of financial crises. 

Of course, these predictions assume universal adoption and enforcement of Basel III by national governments. And though the committee's G-20 members unanimously signed off on the new guidelines, the distributional consequences are not equal across collaborators. 

The deal's obvious winner is the United States, which has been pushing for revised international capital requirement standards for more than a year and has been the clear international leader on the issue. U.S. banks are also significantly ahead of the curve on capital requirements for two main reasons. First, the "stress tests" run by U.S. regulatorsin early 2009 forced banks to increase their equity holdings. Second, the Dodd-Frank financial reforms, now pending full implementation, already impose stricter capital requirements on American banks. Japan and China are also winners, since their banks are equally prepared for the new rules. Indeed, China is already planning on implementingmore-stringent standards.

The United States has an incentive to promote Basel III in order to prevent its banks from suffering a competitive disadvantage due to its own tough guidelines. In fact, the committee's adoption of the Basel III guidelines can already be portrayed as an American victory. 

By contrast, the Europeans are the relative losers from Basel III. Because Europe has been slower to impose new standards on its own institutions, European -- and especially German banks -- are relatively undercapitalized. Prior to the announcement of Basel III,German banks warned that tough standards would impose significant costs on the country's financial system. After the announcement, the French banking lobby complainedthat the new rules could limit banks' ability to finance the economy. 

To some extent, these complaints are overblown, as the generous eight-year timeframe for phased implementation should give banks plenty of time to adapt. Still, in the intervening years, the disproportionate stress placed by the new standards on European institutions may limit access to credit in European economies and consequently slow their recovery. 

On the other hand, Basel III's extended phase-in period may offer European banks an advantage, since U.S. banks will already have to abide by the stricter domestic standards. The U.S. Congress has expressed these very concerns, and Treasury Secretary Timothy Geithner has stated he is "very worried" that other governments may be lax in applying the new rules. 

Indeed, given the diversity of interests and the unequal distribution of costs, enforcement will be a problem. Basel III sets up a classic Prisoner's Dilemma, where each country has an incentive to defect from the agreement even though the best collective outcome is universal cooperation. The preferred outcome for any single country in terms of comparative advantage is for it to avoid implementation -- while every other country implements the requirements. Of course, once one member cheats, all the other members have an incentive to buck the agreement, triggering the worst collective outcome. 

Preventing Basel III from disintegrating into a race to the bottom on capital requirements requires monitoring all signatories and the imposition of sanctions on cheaters. The Bank of International Settlements is ably equipped for the former. The problem is the latter: None of the relevant institutions have any formal enforcement powers and are not likely to get them any time soon. 

With no better options, the U.S. should promise to use its bully pulpit at future G-20 summits to name and shame cheaters. All things considered, this is a pretty weak stick. But for now, reputational costs are all the G-20 can impose on defectors. 

Although the outcome won't be clear for some time, Basel III represents a significant test of post-crisis American leadership. Achieving consensus on international standards was the easy part. Now the U.S. must commit itself to pressing other signatories for full implementation to insure that this is more than a symbolic victory. Basel III also represents a "stress test" of the G-20's ability to effectively coordinate and maintain international economic standards. If progress on implementation is too slow or if some members back out, it will call into question the forum's ability to coordinate economic policy outside of crisis situations.

**Daniel McDowell is a Ph.D. candidate in International Relations at the University of Virginia, specializing in International Political Economy.