Banks & Interest Rates Archives - Page 49 of 59

October 15, 2012

5 Steps Obama or Romney Must Take to Fix Wall Street

By SUZANNE MCGEE

In [Sheila Bair’s] view ….. we haven’t yet come to grips with many of the problems that produced the crisis.

Too many regulators fall victim to one of several fatal flaws, Bair suggested in a speech to the National Association for Business Economics yesterday. Some of them over or under-regulate (usually at the wrong point in the cycle); they devise impossibly complex rules; they are “closet free-marketeers” proposing convoluted rules to prove it’s impossible to regulate financial institutions, or they are “captive” regulators who, without any corruption or malfeasance involved, have simply subordinated their judgment to those of the organizations they are charged with overseeing.

The former chair of the Federal Deposit Insurance Corporation suggests five steps that presidential candidates should take to fix Wall Street………

via 5 Steps Obama or Romney Must Take to Fix Wall Street.

October 11, 2012

The United States Is Not Europe and Texas Ain't France

Extract from remarks by Richard W. Fisher, President of the Dallas Fed, before the Cato Institute:

….Under both Republican and Democratic leadership, we did what was economically sensible. The result was a long-lived expansion. But it ended in tears. Success led to complacency; complacency led to a tolerance and even encouragement of excess. We spent more than we could afford; our government—Republicans and Democrats alike—continued, at an accelerated pace, down the path of promising more in social programs and other spending programs than we could sustain. And on the regulatory front, we turned a collective blind eye to economic malpractice, resulting in the spectacular failure of Enron and culminating with the collapse of megabanks for which even a cursory glance at their balance sheets would have revealed, in the words of one of my colleagues, “nothing on the right was right and nothing on the left was left.”…….

via The United States Is Not Europe and Texas Ain’t France: America as the Thoroughbred Economy – Dallas Fed.

October 10, 2012

Fed Governor Daniel Tarullo Calls for Cap on Bank Size – WSJ.com

By VICTORIA MCGRANE And ALAN ZIBEL:

“In a Philadelphia speech, Fed governor Daniel Tarullo recommended curbing banks’ growth by putting a limit on their nondeposit liabilities, which are sources of funding for operations that go beyond consumer deposits. The idea takes direct aim at the biggest U.S. banks, including J.P. Morgan Chase & Co., Bank of America Corp., Goldman Sachs and Citigroup Inc., all of which rely heavily on such funding. Firms outside of this tier make much greater use of regular deposits…..”

Comment:~ Rather than placing a fixed size limit on too-big-to-fail banks, it may be more effective to raise capital adequacy ratios and/or leverage ratios for banks above a certain size — to discourage further growth. There may well be advantages, such as economies of scale, that enable large banks to deliver better pricing to their customers — and justify their size — but we need to guard against systemic risks. Rather than setting a size limit, higher ratios would ensure that large banks are well capitalized to withstand systemic shocks.

via Fed Governor Daniel Tarullo Calls for Cap on Bank Size – WSJ.com.

October 5, 2012

Are Australian banks adequately capitalized?

Basel III Capital Adequacy Ratios (CAR) will require banks to hold a minimum Total Capital of 8% against risk-weighted assets (RWA), the same as under Basel II, but with additional capital buffers of between 2.5% and 5.0% depending on credit market conditions. With an average ratio of 11.5% (September 2011), Australian banks are short of the maximum Basel III requirement of 13.0% for markets in a credit bubble.

The problem, however, lies not only with CAR but with the definition of risk-weighted assets. Under RWA, loans and investments are not taken at face value but adjusted for perceived risk. These adjustments vary widely between banks in different countries. US banks still apply Basel I risk-weightings:

zero for cash and government debt (OECD Sovereigns);
20 percent for (OECD) banks;
50 percent for mortgages;
100 percent for corporates.

Their counterparts in Asia and Europe apply Basel II risk-weightings, with more lenient mortgage risk weights, averaging 15 percent and 14 percent respectively.

Australia’s 4 major banks similarly apply risk-weightings (supervised by APRA) for residential mortgages as low as 15%, with an average of 17%. That means the big four hold less than 2% capital against residential mortgages. Even after mortgage insurance, Deep T pointed out earlier this year, leverage is close to 50 times capital.

Basel III introduces a minimum 3% leverage ratio which ignores risk-weighting and compares Tier 1 capital to total exposure — total assets plus derivative exposure and off-balance sheet assets. But this is a catch-all and allows banks with high quality assets to continue leveraging at 33 times capital. Fed guidelines are more conservative, requiring a minimum leverage ratio of 4% (“adequately capitalized“) with a recommended 5% minimum for well-capitalized banks. The ratio, however, excludes off-balance-sheet assets. None of Australia’s four majors appear to meet the Fed’s requirement at September 2011 — ranging between 3.9% and 4.8% of Tier 1 capital to tangible assets.

With household debt at a historic high of 150% of disposable income, 3 times higher than in the early 1990s, Australia shows classic symptoms of a credit bubble and cannot afford to be complacent. There are three areas of the banking system that require attention. Capital adequacy ratios need to be lifted as well as risk-weightings for residential mortgages. Improving these two measures should enable Australia’s four major banks to achieve a minimum (Basel III) leverage ratio of 5%.

Sources:

Click to access bcbs189.pdf

http://en.wikipedia.org/wiki/Basel_III
http://en.wikipedia.org/wiki/Capital_requirement

Click to access wp1290.pdf

Click to access wp1225.pdf

Casualties of the externality

Click to access EY%20Reg%20Alert%20Basel%20III%20June%202012.pdf

October 3, 2012

WSJ big interview with Sheila Bair

Former FDIC chairman Sheila Bair favors breaking up the big banks. She also discusses her differences with Tim Geithner during the GFC and how the Treasury Secretary skewed the banking bailout to favor Citigroup.

Click image to play video.

Hat tip to Barry Ritholz.

October 1, 2012

Bernanke attempts to justify screwing savers

This extract from Joe Weisenthal lauds Ben Bernanke’s defense of monetary policy and its effect on savers.

I would encourage you to remember that the current low levels of interest rates, while in the first instance a reflection of the Federal Reserve’s monetary policy, are in a larger sense the result of the recent financial crisis, the worst shock to this nation’s financial system since the 1930s. Interest rates are low throughout the developed world, except in countries experiencing fiscal crises, as central banks and other policymakers try to cope with continuing financial strains and weak economic conditions.

He [Bernanke] then goes onto note that saving isn’t just “having money in a bank” and that the main way to benefit everyone (including savers) is to induce growth:

A second observation is that savers often wear many economic hats. Many savers are also homeowners; indeed, a family’s home may be its most important financial asset. Many savers are working, or would like to be. Some savers own businesses, and—through pension funds and 401(k) accounts—they often own stocks and other assets. The crisis and recession have led to very low interest rates, it is true, but these events have also destroyed jobs, hamstrung economic growth, and led to sharp declines in the values of many homes and businesses. What can be done to address all of these concerns simultaneously? The best and most comprehensive solution is to find ways to a stronger economy. Only a strong economy can create higher asset values and sustainably good returns for savers. And only a strong economy will allow people who need jobs to find them. Without a job, it is difficult to save for retirement or to buy a home or to pay for an education, irrespective of the current level of interest rates.

The way for the Fed to support a return to a strong economy is by maintaining monetary accommodation, which requires low interest rates for a time. If, in contrast, the Fed were to raise rates now, before the economic recovery is fully entrenched, house prices might resume declines, the values of businesses large and small would drop, and, critically, unemployment would likely start to rise again. Such outcomes would ultimately not be good for savers or anyone else.

In layman’s terms, Bernanke is saying that if the Fed didn’t act, everyone, including savers, would be in deep **** (trouble) …….so savers should be happy they are being screwed.

via Bernanke: Federal Reserve & Monetary Policy – Business Insider.

September 19, 2012

Japan Eases Monetary Policy in Surprise Move – WSJ.com

By MEGUMI FUJIKAWA And TATSUO ITO

TOKYO—The Bank of Japan took surprisingly strong steps to further ease its monetary policy on Wednesday, following similar steps by the Federal Reserve, as it tries to tackle entrenched deflation, an export-sapping strong yen and the impact of slowing global growth.

The central bank’s policy board decided at the end of a two-day meeting to increase the size of its asset-purchase program—the main tool for monetary easing with near-zero interest rates—to ¥80 trillion ($1.01 trillion) from ¥70 trillion.

via Japan Eases Monetary Policy in Surprise Move – WSJ.com.

Competitive devaluations, started by the ECB and followed by the Fed, PBOC and BOJ. Let the fun begin!

September 5, 2012

Simon Johnson: Why Are the Big Banks Suddenly Afraid? – NYTimes.com

The threat of too-big-to-fail banks has not diminished. The combined assets of the 6 largest US banks is bigger now than in 2008. Simon Johnson, Professor of Entrepreneurship at M.I.T. Sloan School of Management, writes:

A growing number of serious-minded politicians are starting to support the point made by Jon Huntsman, the former governor of Utah and a Republican presidential candidate in the recent primaries: global megabanks have become government-sponsored enterprises; their scale does not result from any kind of market process, but is rather the result of a vast state subsidy scheme.

…..Serious people on the right and on the left are reassessing if we really need our largest banks to be so large and so highly leveraged (i.e., with so much debt relative to their equity). The arguments in favor of keeping the global megabanks and allowing them to grow are very weak or nonexistent.

The big banks will vigorously defend any attempt to break them up and they have deep pockets. It would be far more effective and politically achievable to raise reserve requirements, lifting capital ratios and reducing leverage to the point that large and small institutions alike are no longer a threat to the economy. Even if we adopt a two-tier approach, with higher ratios for institutions above a certain size.

We need to remember that a fractional-reserve banking system is not an essential requirement of the capitalist system. All that is needed is an efficient intermediary between investors and borrowers. Equity-funded banks proved effective in funding Germany’s industrialization prior to WW1. Islamic banks today follow similar principles. Over-dependence on deposits is the primary cause of our current instability.

via Simon Johnson: Why Are the Big Banks Suddenly Afraid? – NYTimes.com.

September 3, 2012

The Fed and the impact of QE

Unless the Fed announces a new round of quantitative easing before the November election, I do not see the S&P 500 this year advancing past its 2007 high of 1560.

The market generally overreacts to balance sheet expansion by the Fed, anticipating higher inflation. What it seems to overlook is the deflationary effect of private sector deleveraging which should enable the Fed to maneuver a soft landing.

The real impact of Fed policy is to subsidize debtors and starve creditors — private investors and pension funds — of yield. The net result is that investors are driven to higher yields — accompanied by higher risk — which is likely to cause more pain at the next down-turn.

The only way to compensate creditors would be to lower taxes on interest, but I question how high this would rank in either party’s priorities.

September 1, 2012

Bernanke Speech Makes Detailed Case for Fed Action – NYTimes.com

The Fed Chairman hinted at further measures to stimulate employment but is still playing his cards close to his chest as to when and how much:

“It is important to achieve further progress, particularly in the labor market,” Mr. Bernanke said. “Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”

via Bernanke Speech Makes Detailed Case for Fed Action – NYTimes.com.