Senator David Vitter (R-La) along with Senator Sherrod Brown (D-Ohio) is launching an effort to increase capital requirements for big banks and remove risk-weighting of assets as proposed under Basel III.
End Too-Big-To-Fail | Sen. Sherrod Brown [video]
Sherrod Brown (D-Ohio), along with unlikely ally Sen. David Vitter (R-La.), is launching an effort to increase capital requirements for big banks and remove risk-weighting of assets as proposed under Basel III.
In Brown-Vitter Bill, a Banking Overhaul With Possible Teeth | NYTimes.com
Jesse Eisinger from ProPublica skewers big banks’ objections to increasing capital buffers as proposed by the bipartisan Brown-Vitter bill:
Goldman Sachs and S.& P. estimate the big banks might be forced to raise $1 trillion or more. That’s a lot, so much that the leviathans’ agents cry out that they couldn’t sell that much stock. But they don’t have to raise it all at once. And they can retain their earnings and stop paying dividends in addition to selling shares.
In putting that argument forward, they don’t realize they make Senator Brown’s and Senator Vitter’s case for them. If investors are so terrified of the big banks that they won’t buy their stock, that’s a terrific problem. Most of the big banks trade below their net worth, an indication that investors don’t trust them. Brown-Vitter might actually help banks by restoring that trust.
Read more at In Brown-Vitter Bill, a Banking Overhaul With Possible Teeth | Deal Book | NYTimes.com.
Fed sticks to stimulus plan, worried about fiscal drag | Reuters
Pedro da Costa and Alister Bull at Reuters write:
The Federal Reserve stuck to its plan to buy $85 billion in bonds each month to push down borrowing costs and prop up the economy, citing risks to growth from recent budget tightening in Washington.
Read more at Fed sticks to stimulus plan, worried about fiscal drag | Reuters.
How Wall Street Defanged Dodd-Frank | The Nation
Gary Rivlin gives us an insight into the machinations of Wall street lobbyists on Capitol Hill:
As he prepared to sign the Dodd-Frank Wall Street Reform and Consumer Protection Act—the sweeping legislative package designed to prevent another spectacular financial collapse—into law, the president [Obama] first acknowledged the miracle of having a bill to sign at all. “Passing this…was no easy task,” he told the crowd of hundreds. “We had to overcome the furious lobbying of an array of powerful interest groups and a partisan minority determined to block change.”
Indeed, some 3,000 lobbyists had swarmed the Capitol in hopes of killing off pieces of the proposed bill……
That sense of victory barely lasted barely the morning. …..After Dodd-Frank’s passage, lobbyists for the big banks and industry trade groups divided themselves into eighteen working groups, each organized around a different element of the new law. “That’s when the real work began,” Talbott tells me……
Read more at How Wall Street Defanged Dodd-Frank | The Nation.
Eurozone risks Japan-style trap as deflation grinds closer | Telegraph
Ambrose Evans-Pritchard reports:
The region’s core inflation rate – which strips out food and energy – fell to 1pc in March. This is far below expectations and leaves monetary union with a diminishing safety buffer. “The eurozone is tracking the experience in Japan in mid-1990s. There is a very high risk of a slide into deflation,” said Lars Christensen, a monetary theorist at Danske Bank.
Read more at Eurozone risks Japan-style trap as deflation grinds closer – Telegraph.
Deutsche Bank Plans Capital Boost | WSJ.com
A welcome development reported by LAURA STEVENS , DAVID ENRICH and ULRIKE DAUER at the Wall Street Journal:
FRANKFURT–Deutsche Bank AG [DBK.XE] said Monday it will raise €2.8 billion ($3.65 billion) in fresh capital in a dramatic about-face for the bank, which has repeatedly said it won’t turn to shareholders for help boosting its capital cushion.
The bank, Europe’s second-largest by assets, has long faced doubts from investors and analysts about whether it has enough capital to absorb potential future losses and to meet increasingly stringent regulatory requirements……
Deutsche Bank has long been considered thinly capitalized but have always countered with the argument that the leverage is justified by the quality of the assets on their balance sheet. Low risk-weightings provided a false sense of security, with Greek and other PIIGS government bonds rated as zero-risk in the past, encouraging banks to leverage up on precisely the wrong kind of assets. It is time for risk weightings to be removed from bank capital ratios. The bipartisan bill sponsored by US senators Sherrod Brown and David Vitter is a step in the right direction.
Read more at Deutsche Bank Plans Capital Boost – WSJ.com.
S&P 500 at key resistance while Treasury yields fall
10-Year Treasury yields broke through support at 1.70%. Prior to 2012, the 1945 low of 1.70% was the lowest level in the 200 year history of the US Treasury. Expect a test of primary support at 1.40%.
Falling Treasury yields generally indicate a flight from stocks to the safety of bonds. The S&P 500, however, is consolidating below resistance at 1600. Breakout would suggest an advance to 1650, while reversal below 1540 would indicate a correction to the rising trendline at 1475. Recent weakness on 13-week Twiggs Money Flow favors a correction, but oscillation above zero indicates a healthy primary up-trend. A June quarter-end below 1500 would present a strong long-term bear signal.
* Target calculation: 1475 + ( 1475 – 1350 ) = 1600
The Nasdaq 100 index is testing resistance at 2900. Breakout would offer a target of 3400*, but bearish divergence on 13-week Twiggs Money Flow favors a break of 2800 and test of the rising trendline at 2700.
* Target calculation: 2900 + ( 2900 – 2500 ) = 3400
Gold rallied to test resistance at $1500/ounce. Breakout would suggest a bear trap and a rally to $1600, but respect of resistance is likely and would signal another test of support at $1330/1350. A gold bear market indicates falling inflation expectations, but that could also translate into lower growth in earnings and higher Price Earnings ratios.
Structural flaws in the US economy have not been addressed and uncertainty remains high, despite low values reflected on the VIX.
Capital Regulation after the Crisis: Business as Usual? | Martin Hellwig
This abstract from a 2010 paper by Martin Hellwig sums up the debate about overhauling the financial system:
Whereas the Basel Committee on Banking Supervision seems to go for marginal changes here and there, the paper calls for a thorough overhaul, moving away from risk calibration and raising capital requirements very substantially. The argument is based on the observation that the current system of risk-calibrated capital requirements, in particular under the model-based approach, played a key role in allowing banks to be undercapitalized prior to the crisis, with strong systemic effects for deleveraging multipliers and for the functioning of interbank markets. The argument is also based on the observation that the current system has no theoretical foundation, its objectives are ill-specified, and its effects have not been thought through, either for the individual bank or for the system as a whole. Objections to substantial increases in capital requirements rest on arguments that run counter to economic logic or are themselves evidence of moral hazard and a need for regulation.
The bipartisan bill, Terminating Bailouts for Taxpayer Fairness Act, sponsored by senators Sherrod Brown, an Ohio Democrat, and David Vitter, a Louisiana Republican, is a courageous attempt to address the undercapitalization that led to the global financial crisis. Abruptly raising bank capital requirements would lead to a credit contraction if introduced in isolation, but the Fed is quite capable of adjusting monetary policy to offset this and a suitable phase-in period would give banks time to adjust. What is important is that we get to the point where banks are properly capitalized to deal with any future instability.
Read the full paper at Capital Regulation after the Crisis: Business as Usual? | Martin Hellwig, July 2010.
Richard Koo: Why government has to act as “borrower of last resort” during a financial crisis [video]
Richard Koo is the first speaker on this video
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