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Will the Basel III Bank Regulations Change Anything?
The much-trumpeted Basel III increase in capital requirements will not be fully phased in until 2019.
Many are criticizing the slow pace of implementation, including Joseph Stiglitz:
“While
it’s understandable given the weaknesses and the failings of the
banking system that one would want to be slow in introducing these
increased capital requirements, delay is exposing the public to
continued risk,” said Nobel laureate Joseph Stiglitz, a former chief
economist at the World Bank and now a professor of economics at Columbia
University in New York. “Given the high levels of payouts in bonuses
and dividends, it seems a little unconscionable to continue putting the
public at risk with an argument that they cannot more rapidly increase
their own capital.”
And Pimco's Mohamed El-Erian:
“The
phasing-in period for the new capital requirements is surprisingly
long, which will add to the skepticism about the robustness of the bank
capital enhancement efforts.”
The former chief economist for BIS - William White - says that banks aren't lending because consumers are tapped out, not because of capital requirements, and therefore:
Tightening regulation and capital requirements will not hurt the economy as much as might otherwise have been expected…
In other words, White debunks the idea that raising capital requirements too quickly will curtail lending and hurt the economy.
Phillip Hilderbrand, Chairman of the Swiss National Bank, points out that Basel III doesn't address the too big to fails:
While
the reform package is far-reaching, it does not yet comprehensively
address the TBTF ("too big to fail") problem. Further efforts will be
required in that area at the international and at the national level.
Yves Smith notes:
Valuation: the capital ratios mean nothing if the assets are overvalued. Waldman is always going on about this. It ends up as quite a radical critique: capital ratios without valuation reform = cart before horse.
Accounting:
there is still no harmonization of accounting practices on all the
shadow banking apparatus: for instance, special purpose vehicles,
derivative netting and repos. Actually, of course, when you come across
things like Repo 105, or BoA’s quarter end balance sheet manipulations, there don’t seem to be any relevant reputable accounting practices at all; even if you think Lehman’s liquidity pool
probably is an outlier, some of this stuff really, really needs
fixing. And do we think that under Basel III there will be more
accounting dodges that will cross the line from ‘asset sweating’ to
‘accounting manipulation’? Not Basel III’s fault, but I rather think
we do expect exactly that.
Regulatory risk weightings are still a mess, with the ratings agencies still ensconced as the arbiters of credit quality.
Then of course there is shadow banking, which Basel III largely dances around. One particularly glaring example is the whole custody/client money/asset segregation/rehypothecation/title mess in London.
There’s not a peep, burble or whisper here in the UK about the sort of
legal reforms (somewhat in the manner of the US’s 1934 Securities Act,
perhaps, plus a UK version of SIPC) that would sort this out. Recent
Lehman-related rulings on Client Money actually mess the situation up even more.
***
I have nothing to say about enforcement; it’s been such a long time since I’ve seen any that I’ve forgotten what it is.
In
the end, these and other regulatory arbs are all consequences of
politics. Pending some unimaginable transformation there, in which
regulators somehow acquire the discretion to pick fights with banks,
[things won't look very different from how they did before the last
crisis].
Karl Denninger writes:
In absolute terms....
1 / 0.045 = 22:1 absolute maximum leverage.
1 / 0.07 = 14.3% leverage beyond which no dividends may be paid.
Sounds rather reasonable, doesn't it?
Well, the latter is. Indeed, it's about what the former legal limit was before Henry Paulson, as head of Goldman, got the SEC to lift it from the investment banks.
An
act that, as I have repeatedly pointed out for three years, made
possible the blow-off top in both housing and the debt markets, and
materially increased the amount of damage done by the financial crisis.
But
none of these figures matter a bit unless banks are forced to value
assets fairly. And until we see the FDIC stop coming in and taking
losses on banks that according to their alleged "call reports" are perfectly solvent, we will not have seen the end of the lies.
I'm sorry folks, but this is all political theater and BS so long as institutions like Wells Fargo (WFC), Bank of America (BAC), Citibank (C) and others can hold hundreds
of billions or even more than a trillion - each - off balance sheet
without no clean accounting for the value of the alleged "assets", and
they both are and do.
By some figures many European banks are running actual
leverage ratios closer to 50:1, mostly for the same sort of reasons.
The so-called "stress tests" ignored anything not held in a trading
book, which was dramatically more than the "trading" amount, and leaves
open to question whether there was some hinky re-shuffling ahead of
the so-called "test" as well.The
committee has yet to agree on revised calculations of risk-weighted
assets, which form the denominator of the capital ratios to be
determined this weekend. The implementation details of a short-term
liquidity ratio will also be decided by the time G-20 leaders meet,
members say. A separate long-term liquidity rule will likely be left to
next year.Yeah, that's one of the scams that has been run too - so-called "liquid assets" that aren't really liquid.
Hint: Only short-term (say, 26 week and less) government bonds and cash
are truly liquid assets, as only debt instruments without material
duration risk and actual vault cash can be counted on to be turned into cash
during a liquidity squeeze. Don't hold your breath on the Basel
Clowns restricting the definition to these instruments - in fact, I'll
bet anyone a case of Scotch they won't.
Even CNBC is skeptical:
The
historic banking reforms agreed in Basel over the weekend are
pointless and won't stop the next crisis destined to hit the markets,
Alpesh Patel, principal at Praefinium Partners, told CNBC Monday.
"In
so many ways, it's so irrelevant," Patel said. "Crashes tend not to
repeat themselves in the same manor, so we're fighting the last battle."
***
Patel also criticized the longer-than-expected lead time that financial firms are allowed in which to implement the changes.
"The
other problem with this is that the regulators have shown quite a
degree of leniency time and time again… they don't to make the really
tough decisions because they're too afraid of spooking the markets," he
said.
The bottom line: capital requirements might be helpful if other - more fundamental - reforms are implemented. But unless core reforms are implemented, nothing will change.
- advertisements -
List all your toxic waste on an exchange with a 300 page downloadable prospectus 'for investors' and make wide 2-way markets for small size. The simple fact of listing cuts your reserve requirements under BaselIII.
Banks will find their way past these new buffers in a matter of weeks not years.
This is a silly distraction. We must fight the real enemy...
http://williambanzai7.blogspot.com/2010/09/join-fight.html
How does one not spook an already stampeding herd?
http://theautomaticearth.blogspot.com/2010/09/september-13-2010-basel-ii...
Basel 1, 2, 3 are a complete joke. I use to work in a bank dept that dealt with this shit and it's a joke. Punt the ball down another 9 years and see what happens...
IT'S A PUT ON...A PUT ON.....
WE ARE HIDING.
Basel III is a joke ... a legitimatization of insolvency, if you will.
The only good career for a banker is digging their own grave.
who da feck gave these clowns the right to feck with OUR BANKING SYSTEM ,ANYHOO?
OUR?
OUR?
You got pronoun trouble. Maybe more than just pronoun trouble.
Our indeed.
Apologies for 'repost' yet remember ZH'ers:
"Given the very high level of reserve balances currently in the banking system, the Federal Reserve has ample time to consider the best long-run framework for policy implementation. The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system" -- Federal Reserve February 10, 2010
www.federalreserve.gov/newsevents/testimony/bernanke20100210a.htm#fn9
Damn.