Tag: bank capital requirements

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Financial Reform Rising | Perspectives | BillMoyers.com

Simon Johnson describes how support for financial reforms is rising despite banks fighting tooth and nail to restrict changes to the current status quo.

In the early and mid-2000s, US officials allowed large financial institutions to take on big risks – being persuaded that the people running those firms knew what they were doing. In particular, important parts of our financial system became highly leveraged, in the sense that they took out debts that were very large relative to their shareholder equity. At that time, on average, the world’s largest banks had equity worth only around two percent of their total balance sheets. As asset values went up, so did bonuses – financial executives are typically paid based on their “return on equity,” unadjusted for risk. When house prices turned down and related losses mounted, these small amounts of shareholder equity – the core of what is known as capital in the banking world – were quickly wiped out for the most highly leveraged firms.

The logical next step would have been a set of reforms to prevent big financial firms from ever becoming so highly leveraged again…..Not surprisingly, the big banks and their allies fought back against any reasonable reforms that would limit their leverage and their ability to take big risks. The Dodd-Frank reforms passed by Congress in summer 2010 were, as a result, disappointing.

Increasing bank capital requirements and limiting the types of activities that FDIC-insured banks can engage in are in everyone’s best interest. Even in the long-term interest of banks. But unfortunately bankers are focused on their short-term bonuses and not the long-term stability of the financial system.

Read more at Financial Reform Rising | Perspectives | BillMoyers.com.

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Bloated business of banking | The Australian

Adam Creighton discusses the likelihood of taxpayers being asked to bail out too-big-to-fail banks.

In Australia that probability is now 100 per cent. Standard & Poor’s, a ratings agency, gives Australia’s biggest four banks a AA rating explicitly because taxpayers will provide “extraordinary support” to their creditors in any crisis, an implicit guarantee worth more than one-quarter of the four’s annual profits.

Since 1995, the big four Australian banks’ assets, reflecting a global trend, have ballooned from 94 per cent of Australia’s national income to $2.86 trillion, or 190 per cent.

Read more at Bloated business of banking | The Australian.

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Finally, Bank Regulators Have Had Enough | ProPublica

Jesse Eisinger observes US bank reactions to efforts to raise their minimum capital requirements. Many argue that the new rules will harm their competiveness.

Jamie Dimon, the chief executive of JPMorgan, raised the ominous specter that global rules are out of “harmonization” and that United States banks are now held to a higher standard.

“We have one part of the world at two times what the other part of the world is talking about,” he said. “And I don’t think there’s any industry out there that would be comfortable with something like that in a long run.”

To rebut that, I bring in a banking expert: Jamie Dimon. This side of Mr. Dimon’s mouth has repeatedly boasted about what a competitive advantage JPMorgan’s “fortress balance sheet” is, how the bank was a port in the 2008 storm…….

By raising capital standards and installing tougher derivatives rules, regulators are helping banks that are too foolish (or rather, the top executives who are too narrowly self-interested in increasing their own compensation in the short term) to recognize their own interests.

Increasing bank capital requirements would lower their perceived risk and decrease their cost of capital, giving them an advantage over international rivals with less stringent standards.

Read more at Finally, Bank Regulators Have Had Enough – ProPublica.

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US banks face tougher capital requirements

Yalman Onaran and Jesse Hamilton at Bloomberg report on a new joint proposal by the Federal Deposit Insurance Corp., Federal Reserve and Office of the Comptroller of the Currency:

The biggest U.S. banks, after years of building equity, may continue hoarding profits instead of boosting dividends as they face stricter capital rules than foreign competitors.

The eight largest firms, including JPMorgan Chase & Co. (JPM) and Morgan Stanley (MS), would need to retain capital equal to at least 5 percent of assets, while their banking units would have to hold a minimum of 6 percent, U.S. regulators proposed yesterday. The international equivalent, ignoring the riskiness of assets, is 3 percent. The banks have until 2018 to fully comply.

The U.S. plan goes beyond rules approved by the Basel Committee on Banking Supervision to prevent a repeat of the 2008 crisis, which almost destroyed the financial system. The changes would make lenders fund more assets with capital that can absorb losses instead of using borrowed money. Bankers say this could trigger asset sales and hurt their ability to lend, hamstringing the nation’s economic recovery.

While the authors term the new regulations “harsh” on bankers and likely to freeze bank lending, existing lax capital requirements give bankers a free ride at the expense of the taxpayer. Their claims are baseless:

  • existing bank leverage is way too high for a stable financial system;
  • US banks are flush with funds, holding more than $1.8 trillion in excess reserves on deposit with the Fed and $2.6 trillion invested in Treasuries and quasi-government mortgage-backed securities, so talk of a lending freeze is farcical;
  • banks can function just as well with equity funding as with deposit funding;
  • higher capital ratios will make it cheaper for banks to raise additional capital as lower leverage will reduce the risk premium.

So why are bankers squealing so loudly? In a nutshell: bonuses. Higher capital requirements and no free ride at taxpayers’ expense would mean that shareholders claim a bigger slice of the pie, with less left over for management bonuses.

For a detailed rebuttal of bankers’ claims see Anat Admati and Martin Hellwig.

The big four Australian banks should take note. They currently maintain between 4.1% (CBA) and 4.5% (WBC) of capital against lending exposure. Raising the ratio to 6.0% would require 33% to 50% new capital.

Read more at U.S. Banks Seen Freezing Payouts Under Harsh Leverage Rule – Bloomberg.

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Basel committee willing to rethink complex bank rules | FT.com

Brooke Masters reports:

The Basel Committee on Banking Supervision said in a discussion paper released on Monday that it shares the concern of critics who believe the main measure of bank safety – the core tier one capital ratio – is too complicated and makes it difficult to compare banks.

Its own research shows banks are using wildly different models to calculate the risk-weighted assets that make up the denominator of the ratio, resulting in some institutions holding 40 per cent less capital against the same kinds of banking assets as their peers.

Read more at Basel committee willing to rethink complex bank rules – FT.com.

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Making banks hold more capital is not going to wreck the economy

Mark Gongloff quotes Anat Admati and Martin Hellwig of the Max Planck Institute, authors of the recent book The Bankers’ New Clothes: What’s Wrong With Banking And What To Do About It, from their point-by-point rebuttal of bankers arguments that they should not be required to hold more capital:

“Many banks, including most of the large banks in the United States, are not even using all the funding they obtain from depositors to make loans,” Admati and Hellwig write. “If banks do not make loans, therefore, the problem is not a lack of funds nor an inability to raise more funds for profitable loans, but rather the banks’ choices to focus on other investments instead.”

Read more at No, Making Banks Hold More Capital Is Not Going To Wreck Lending Or The Economy | Huffington Post.

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Barclays’ threat on lending under fire | FT.com

Anne-Sylvaine Chassany at FT writes of the UK’s Prudential Regulation Authority:

The PRA irked banks when it included a 3 per cent leverage ratio target in its assessment of UK lenders’ capital health. It identified shortfalls at Barclays and Nationwide, the UK’s largest building society, which have projected leverage ratios of 2.5 per cent and 2 per cent respectively under PRA tests.

Outrageous isn’t it? That banks should be asked to maintain a minimum share capital of three percent against their lending exposure — to protect the British taxpayer from future bailouts. My view is that the bar should be set at 5 percent, although this would have to be phased-in over an extended period to prevent disruption.

I hope that APRA is following developments closely. The big four Australian banks are also likely to be caught a little short.

Read more at Barclays’ threat on lending under fire – FT.com.

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Lurking beneath Australia’s AAA economy… | On Line Opinion

Kellie Tranter highlights the unstable position of the big Australian banks:

Australia has had a current account deficit since the 1980s. That means we are spending more than we are earning. We’ve had to sell public assets to balance the current account deficit. Put simply, the surplus on the capital account is flogging off the sideboard to buy the fruit.

Our net international financial position is not strong and our gross foreign liabilities are alarming. Banks are the intermediaries between foreign lenders and Australia’s big spenders. The banks have mediated the private household debt and as a result if there is a worldwide recession, banks could be called to pay up.

Our banks have borrowed short (internationally) and lent long (domestically, for mortgages etc.)…….

I have been sounding off about the inadequate capital reserves of the big four banks — because of low risk-weightings attached to residential mortgages — but Kellie also raises the question of their $13.8 trillion derivatives exposure. She concludes:

If the banks are hunky dory why is it necessary [for the RBA] to set up a $380 billion emergency fund and, more importantly, is it enough in light of possible derivatives exposure?

Read more at Lurking beneath Australia's AAA economy… – On Line Opinion – 25/6/2013.

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