Category: Banks & Interest Rates

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Regulators Weigh Easing of Global Bank Rules – WSJ.com

Following months of intense industry pressure, regulators say they now plan to make it easier for banks to comply with a key provision of new international banking rules that will require lenders to maintain sufficiently deep pools of safe, liquid assets—like cash and government bonds—that can survive market meltdowns and other crises…..Among the planned changes, one would allow a wider variety of assets—such as gold and equities—to count toward banks’ liquidity buffers, according to people involved in the talks.

….Some experts warn that loosening the rules could lead banks to rely on assets that later become unsafe. “The widening of the definition [of eligible assets] can spell trouble, because we may discover illiquidity precisely when the liquidity is needed,” said Anat Admati, a professor at Stanford University’s Graduate School of Business.

via Regulators Weigh Easing of Global Bank Rules – WSJ.com.

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US banks face squeeze

Rising short-term interest rates (represented by 3-month Treasury yields on the chart below) caused negative yield differentials in 2006/2007 which led me to warn of an economic down-turn. Yield differentials are calculated by subtracting short-term (3-month) yields from long-term (10-year) yields. Banks borrow mostly at short-term rates and lend at long-term rates, generating a profitable interest margin. But when the yield differential turns negative, bank interest margins are squeezed, forcing them to contract lending. A lending contraction shrinks consumption + investment and sends the economy into a tail-spin.

Ten-Year Treasury Yield and Differential with Three-Month Yields

Negative yield differentials (or yield curves) are normally caused by rising short-term rates as in 2006/2007, but now we are witnessing the opposite phenomenon. Short-term rates are near zero, but falling long-term rates are starting to squeeze the yield differential from the opposite end. The situation is not yet desperate but a further decline in long-term yields would shrink bank interest margins. Fed initiation of QE3, purchasing additional long-term Treasuries, is likely to drive long-term rates lower and exacerbate the problem. The resulting contraction in bank lending would cause another economic down-turn.

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Dimon may be ‘stupid,’ but he’s right on banks – MarketWatch

David Weidner: A return to Glass-Steagall in the U.S. would effectively force the world to separate traditional banking from casino banking.

That system would be attractive to both sides. The banking system that holds our loans, our deposits, debts and assets would be separate from a Wild West free market unfettered by bank regulators and their constant worries about risk.

So why can’t the big financial institutions get behind this one? Simple. They want to gamble your money in the casino.

via Dimon may be ‘stupid,’ but he’s right on banks – David Weidner’s Writing on the Wall – MarketWatch.

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Paul L. Kasriel: Don’t End the Fed, Mend the Fed

Although the return to a gold standard for our monetary system has much appeal, it is unlikely to occur. So, let’s not let the perfect be the enemy of the good. Perhaps there is second-best monetary policy approach to the gold standard that might achieve most of the desirable outcomes of a gold standard but might have a greater probability of actually being adopted……. My suggested approach is very similar to one advocated by Milton Friedman at least 60 years ago. The more things change, the more they stay the same, I guess. I am proposing that the Federal Reserve target and control growth in the sum of credit created by private monetary financial institutions (commercial banks, S&Ls and credit unions) and the credit created by the Fed itself. I believe that this approach to monetary policy would reduce the amplitude of business cycles, would prevent sustained rapid increases in the prices of goods/services and would prevent asset-price bubbles of the magnitude of the recent NASDAQ and housing experiences.

econtrarian_043012.pdf (application/pdf Object).

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FRB| Governor Tarullo: Regulatory Reform since the Financial Crisis

It is sobering to recognize that, more than four years after the failure of Bear Stearns began the acute phase of the financial crisis, so much remains to be done–in implementing reforms that have already been developed, in modifying or supplementing these reforms as needed, and in fashioning a reform program to address shadow banking concerns. For some time my concern has been that the momentum generated during the crisis will wane or be redirected to other issues before reforms have been completed. As you can tell from my remarks today, this remains a very real concern.

via FRB: Speech–Tarullo, Regulatory Reform since the Financial Crisis–May 2, 2012.

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Basel takes aim at Mega Bank – MacroBusiness

Deep T: On the one side we have an Australian housing market which is close to the most unaffordable in the world with mortgage debt at 100% of GDP also close to the highest of any country, yet Mega Bank [the Big Four banks] calculates its minimum capital requirements at 1.6% on residential mortgages which undoubtedly would be close to the lowest of any bank in the world….. Surely, the result the Basel Committee assessment is a foregone conclusion?

Sadly, no. On the other side, however, we have an equally formidable opponent. Do not underestimate the politico-housing complex. The smoke screens will be built and a whitewash is on the cards. Australia has a history of painting a very rosy picture of our financial system and housing market in the face of significant known risk factors.

via Basel takes aim at Mega Bank – MacroBusiness.

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Watch out! Is the Fed pushing us into another bubble? – Fortune's deals blog Term Sheet

The Fed’s actions have kept Treasury bond prices high (while keeping the government’s interest costs low), but the fundamentals do not support the high valuations, given the fiscal mess we are in. Sooner or later, the bond bubble will burst. History has shown that a structurally weak economy combined with a fiscally irresponsible government propped up by accommodative central-bank lending always ends badly.

….The biggest beneficiaries of loose money, are our profligate elected officials who refuse to come to grips with budget deficits and an exemption-laden tax code. As long as Treasury can borrow cheaply to paper over the real problems, politicians can demagogue about overspending (GOP) or undertaxing (Democrats) while dodging their responsibility to work together to fix our problems.

via Watch out! Is the Fed pushing us into another bubble? – The Term Sheet: Fortune’s deals blog Term Sheet.

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Sowing Seeds of the Next Major Crisis – WSJ News Hub

Francesco Guerrera: “Prolonged intervention by the authorities is creating fundamental distortions in the financial markets. They are in my view going to create the next crisis.”

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