Margin Calls Coming On US Too-Big-To-Fail Banks

Tyler Durden's picture

Authored by Steen Jakobsen via his blog,

This week's biggest news is not the Nonfarm Payrolls, or the European Central Bank or even Portugal's government falling. No - this week's big deal is the openness with which the Federal Reserve is preparing a major margin call on the too-big-to-fail banks in the US. 

This has been a long time coming since the introduction of the Dodd-Frank law back in 2010 but it is a game changer. Remember all macro paradigm shifts come from policy impulses, often mistakes.

Fed approves step one in a three step plan

Under the final rule, minimum requirements will increase for both the quantity and quality of capital held by banking organisations. Consistent with the international Basel framework, the rule includes a new minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5 percent and a common equity tier 1 capital conservation buffer of 2.5 percent of risk-weighted assets that will apply to all supervised financial institutions. The rule also raises the minimum ratio of tier 1 capital to risk-weighted assets from four percent to six percent and includes a minimum leverage ratio of four percent for all banking organisations. In addition, for the largest, most internationally-active banking organisations, the final rule includes a new minimum supplementary leverage ratio that takes into account off-balance sheet exposures. (See the press release here

I know you are thinking: Wow, this is the most interesting thing I have seen in years :-) but alas it is - because it is in fact a major margin call on the US holding banks.

Note how this adoption is only the first set of a series of new rules. Let me introduce you to: Daniel Tarullo, The Federal Reserve Governor in charge of regulation after the implementation of the Dodd-Frank law in 2010. (As a consequence of Dodd-Frank, the Fed got a permanent regulatory governor.) 

I had nothing else to do so I read his latest speeches which are surprisingly clear (considering that he's a policy guy).

Governor Daniel K. Tarullo At the Peterson Institute for International Economics, Washington, D.C.

May 3, 2013 Evaluating Progress in Regulatory Reforms to Promote Financial Stability

The speech considers the "additional charges" which are coming and today's Basel III was only item number one:

First, the basic prudential framework for banking organisations is being considerably strengthened, both internationally and domestically. Central to this effort are the Basel III changes to capital standards, which create a new requirement for a minimum common equity capital ratio. This new standard requires substantial increases in both the quality and quantity of the loss-absorbing capital that allows a firm to remain a viable financial intermediary. Basel III also established for the first time an international minimum leverage ratio which, unlike the traditional US leverage requirement, takes account of off-balance-sheet items.


Second, a series of reforms have been targeted at the larger financial firms that are more likely to be of systemic importance. When fully implemented, these measures will have formed a distinct regulatory and supervisory structure on top of generally applicable prudential regulations and supervisory requirements. The governing principle for this new set of rules is that larger institutions should be subject to more exacting regulatory and supervisory requirements, which should become progressively stricter as the systemic importance of a firm increases.


This principle has been codified in Section 165 of the Dodd-Frank Act, which requires special regulations applicable with increasing stringency to large banking organizations. Under this authority, the Federal Reserve will impose capital surcharges on the eight large US banking organizations identified in the Basel Committee agreement for additional capital requirements on banking organisations of global systemic importance. The size of surcharge will vary depending on the relative systemic importance of the bank. Other rules to be applied under Section 165—including counterparty credit risk limits, stress testing, and the quantitative short-term liquidity requirements included in the internationally-negotiated Liquidity Coverage Ratio (LCR)—will apply only to large institutions, in some cases with stricter standards for firms of greatest systemic importance.


An important, related reform in Dodd-Frank was the creation of orderly liquidation authority, under which the Federal Deposit Insurance Corporation can impose losses on a failed systemic institution's shareholders and creditors and replace its management, while avoiding runs and preserving the operations of the sound, functioning parts of the firm. This authority gives the government a real alternative to the Hobson's choice of bailout or disorderly bankruptcy that authorities faced in 2008. Similar resolution mechanisms are under development in other countries, and international consultations are underway to plan for cooperative efforts to resolve multinational financial firms.


A third set of reforms has been aimed at strengthening financial markets generally, without regard to the status of relevant market actors as regulated or systemically important. The greatest focus, as mandated under Titles VII and VIII of Dodd-Frank, has been on making derivatives markets safer through requiring central clearing for derivatives that can be standardised and creating margin requirements for derivatives that continue to be written and traded outside of central clearing facilities. The relevant US agencies are working with their international counterparts to produce an international arrangement that will harmonise these requirements so as to promote both global financial stability and competitive parity. In addition, eight financial market utilities engaged in important payment, clearing, and settlement activities have been designated by the Financial Stability Oversight Council as systemically important and, thus, will now be subject to enhanced supervision.

A margin call is coming...

To illustrate the case, here's  several quotes and links from today's media:

Crenews.comFederal regulators on Tuesday are scheduled to unveil and vote on the final provisions they have set for the US's implementation of international banking standards that could result in banks pulling back on their commercial real estate activities, including lending, mortgage servicing and CMBS investments. Industry groups are lobbying to lessen the potential impact of the rules.


See also USA Today: Most banks are already in compliance with the rule, according to the Fed, though it estimates about 100 banks will need to raise roughly USD 4.5 billion in capital by 2019.The new rules simplify the risk calculations for mortgages, a process that community lenders had argued was too complex and would limit their ability to provide home loans. Community and regional banks comprise more than 90% percent of US lenders, according to the Federal Deposit Insurance Corp (FDIC). The Fed unanimously approved the 792-page set of standards, which were mandated by the 2010 financial overhaul law. The FDIC and the Office of the Comptroller of the Currency are also expected to approve the new standards


Reuters: However, the Fed warned it was drafting four more rules that would go beyond what the Basel accord called for, including one on leverage and another on a capital surcharge. (See full version of this story here.)


Why is this important? Because part of the Fed's new remit since Dodd-Frank makes it responsible for bubbles in banking — it is even more interesting because clearly, to me at least, this is a major part of why Bernanke and Dudley at the FOMC are willing to ignore the lower inflation. This low inflation has both monetarist and Keynesians up in arms, and as it is often the case, the REAL reason for major macro paradigm shifts comes from policy mistakes in this case pro-cyclical regulation.

Prepare yourself and please do read the above. If not we are doomed to focus on QE-petering while Fed gives the whole banking industry a major margin call.


The Bottom Line (as Jakobsen comments) is that banks run on "leveraged" / borrowed money - Now the Fed is going to reduce their ability to use leverage which technically equates to a margin call - put more money up or reduce position.

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francis_sawyer's picture

Time to thin out the herd once again, consolidate their useful assets into 'tribal' hands... & send the bill for the crap to Johnny...

flacon's picture

The problem is... Goldman Sachs, JP Morgan ARE the Fed, or at least they are brothers in arms. I am as bearish as any but alas I don't see the Fed causing any harm to it's brothers and sisters. 

TuesdayBen's picture

Uhh, I see this getting the ol' Obamacare push-er-back a year, and then push-er-back another year routine...  I mean, the Affordable Care Act is law, just like Dodd-Frank.  Right?

flacon's picture

They could confiscate depositor's accounts... you know... the undersevedly "rich" people like small businesses who have cash on hand to pay their employees. "They don't need that cash."


"The Fed unanimously approved the 792-page set of standards" ~ Shit, that's like reading the Lord of The Rings novel. Did anyone of importance actually read all seven hundred and ninty two pages, plus the cover and the back page? There is a full colur naked spread of Lindsey Graham in the centerfold page 396 - POSTER. 


Oh, Lindsey is a man. Your milage may vary with that photo. 

kliguy38's picture

the targets aren't JPM or GS or any of their brothers in arms.....the thinning of the hers will be through the non-"brothers"...and it will be brutal....there will be confiscation that will go directly into the big bank coffers.....after all they ARE "too important" to fail......but YOU aren' Carlin aint in the club

knukles's picture

Nah, they'll all just buy a couple hundred shares of the Fosdick Brother's BiTcoiNDealOfTheYear (underwrit by Goldman, JPM and BoAML) and count it as tier 1, no haircut capital, valued as an intangible in level/category 4 with no pricing available, make believe asset.

Basta Fungool!

macholatte's picture


Under the final rule, minimum requirements will increase for both the quantity and quality of capital held by banking organisations.


Gimme a break! Not even under Glass-Steigal were the banksters properly supervised and regulated. In fact, that imbecile Greenspan even had the gall to say he thought the banks would self-regulate. WTF.


From each according to his abilities, to each according to his needs.

Karl Marx

fourchan's picture

suspend mark to market, shift all the tbtf banks bad assets to the fed

aka your grand kids, receive 100 cents on the dollar at zirp buy all

the stock of the productive companies in the usa, own the stock market. clever bit of treason.

bornlastnight's picture

They didn't have to read it. They just needed to vote on it.

bluskyes's picture

The way these bills get rammed through Congress, they should just vote to accept a pallet of blank copier paper - to be filled in at Obama's leisure.

NoDebt's picture

Don't give them any more ideas.  They have plenty of bad ones already.

Jam Akin's picture

Who needs paper these days?

toadold's picture

Does anybody have any proff that Lindsey is a man? Why just the other day I heard someone call him a "lying two faced Biatch."

Translational Lift's picture

I'm sure he's someones bitch ...........

MissCellany's picture

"They could confiscate depositor's accounts..."

Tht was my first thought, too. This seems like a potentially dangerous situation. Businesses pass on higher costs of doing business to customers...and a bail-in would be the, er, perfect way for these banks to cover their "losses."

Herd Redirection Committee's picture

If banks do a bail in, they better get real ready to start paying interest on deposits again... 

All Risk No Reward's picture

With organic growth (GDP-Debt) contracting to the tune of $500 billion a quarter and the banksters orchestrating interest rates higher, something wicked this way comes...

Danger Will Robinson.

Jake88's picture

WTF Are you feeling OK

SDShack's picture

Extend and pretend. Rinse and repeat. If that doesn't work, lobby 0zer0 to suspend the rules, just like he did with 0zer0care. If that doesn't work...bailout. If that doesn't work, pull a MF Global and John Corzine. 0zer0 will either instruct the FDIC, SEC, Justice Dept & Holder to look the other way. There is no way any TBTF banks will ever fail again. Print to Infinity and Beyond. If that's not enough, rape bondholders like 0zer0 did with GM, or the EU/IMF did with Greece and Cyprus with their forced "voluntary" haircuts. Eventually, all retirement savings will be raided before a TBTF bank dies.

bluskyes's picture

At least not as long as the banks can buy off the ratings agencies.

All Risk No Reward's picture

No need - guys like Buffett on BOTH the banks and the ratings agencies.

It is all orchestrated by the Big Finance Capital puppeteers.

They control everything big of substance.

That's the benefit to lending the world their money supply at interest.

illyia's picture

flacon... bail-in. a la cyprus.


Dewey Cheatum Howe's picture

Bail-ins are written into the Dodd Frank bill so very likely. Cyprus was the dry run to see how much they could get away with.

sessinpo's picture

 flacon      " The problem is... Goldman Sachs, JP Morgan ARE the Fed, or at least they are brothers in arms."



Why do you see that as a problem? How many firms have come and gone only to replaced by other firms with the same elite?

It's only musical chairs. Very few brothers and sisters are really harmed. They are simply transferred.

Groundhog Day's picture


Consider this alternative theory:

JPM and GS being the most powerfull and closest to the fed has approved the trade so they can shake out 2-3 lower banks and get the assets cheap....perhaps 2 bucks (BS) placing any bail out funds needed on the good ol trustworty US Taxpayer.  Short term pain for them only to come out bigger and stronger.  Perhaps even comingleing some of their crap onto the books of the shitier acquired company.  Who's gonna check and report anything until 2-3 years later when no one cares.


It always the same....International Poker

nmewn's picture

Thinning out the herd...completely OT but funny as

"Lauren Fagen, 18, says she was kissing the fur of a male lion named Duma when he suddenly reached through the bars of his cage, grabbed her legs in and began mauling her."

Ms Fagen said she felt a ‘deep connection’ to wild animals, especially big cats, and wanted to explore her ‘passion’ before entering university in September."

Mzzz Fagen, if I may, big cats tend to look at you as either food or a potential threat.

Professor nmewn ;-)

Clycntct's picture

I thouoght that's how they made Kidde litter.

NoDebt's picture

Those animal lovers are a little touched in the head, I think.  They all get "Steve Irwin'ed" in the end.

Had a good friend of mine who loves horses end up in the hospital recently.  After a succession of bad incidents over the last 2 years, this one got him good.  Kicked him in the gut and ruptured his spleen.  (You can bleed out VERY quickly from a ruptured speen, by the way- lots of blood flow through it.)  Got airlifted right out of the field and they narrowly managed to save his life.  Long recovery ahead for him.

Don't hang out with animals that can easily kill you.  It really is a bad idea.  Buy a Hermit Crab.  In a pinch (pun intended) most people can take a Hermit Crab down.

If, however, you are rich and stupid, please feel free to play with Lions as much as you want.  Or get your pilot's license and pretend you're "Top Gun" by flying experimental single seat aircraft on the weekends.  By far my favorite way to hear about some stupid-rich SOB buy the farm.

JohnG's picture



As for horses, work with them long enough and you WILL have many broken bones.

logicalman's picture

Meeting the ground having fallen from the back of a galloping horse definitely hurts.

Same applies to a mountain bike down a steep hill.

I'll try not to do either again.

Herd Redirection Committee's picture

I like to walk in the woods.  But by no means do I consider that just because I have been in the woods 1000 times that its safe.  When my dog and I step into the woods I am stepping onto another animals territory, plain and simple.

frostfan's picture

My problem with the story is all the big banks like citi, Jpm and. Wells are way over these limits right now.

max2205's picture

I call bullshit on this idea...this would make tbtf turn to dust overnight as they are all beyond insolvent for the last 10 years anyway. 


Oh and fuck Dodd and double fuck Frank....worthless crminal asshole traitors

Herd Redirection Committee's picture

I imagine it will be  a case of selective enforcement, like with everything else (i.e. the two-tier law system, growing cannabis is bad, ponzi schemes and counterfeiting doublepluss good).  The TBTF will say "Yes, we have enough capital, trust us."

The little guys will say "This shouldn't even apply to us", and TBTF will say "thank you very much, pleasure taking your business".

MontgomeryScott's picture

Adrian Salbuchi and the Mogambo Guru just got this link.

sgorem's picture

isn't physical AU Tier One now? thought so. looks like everything is working out to the Plan. all the gold should be shaken out of the tree, and into the banksters vaults by the time this shit kicks in. imo. they're gonna sssttttrrrrrrrrrrrreeeeeeeeeccccchhhhhhhhhh this fucker out until the Bankster Puppies get old enough to take over and  carry out the Family Tradition of fleecing the newbie sheeples of the world, cause having EVERYTHING just ain't enough.

sgorem's picture

*and as a side note, IF AU is tier 1, what's that make owning/printing/issuing the majority the Gold ETF's? that would be a shit load of "capitalization" would it not? might be a damn good reason to hold the Precious, like forever............

ekm's picture

What did I say?

NidStyles's picture

No idea, wasn't paying attention. Had too much to catch up on Game of Thrones...





/sarc for you morons.

Uber Vandal's picture

Even Tyrion Lannister, the new Master of Coin, understands that being in debt is bad.


ekm's picture

big banks are not in debt, they are hyperleveraged

leverage is NOT debt. Debt exists from entity A to entity B


Leverage is money that does not exists. Once collapse starts, it simply disappears into absolutely nothing

ekm's picture

Theoretical. You have $100k but buy $1million stocks at $10/share.

Condition: if stock falls to $7, margin is called.

Nobody lent that money to you, you simply bought $1m of stock by depositing your $100k.

Big banks are allowed to do that. Margin accounts work like that.


Stocks drops to $5, bank/broker sells your stocks without asking you and keeps the $100k.

You are broke.


Same with big banks. They buy stocks/bonds at 3% capital, the other 97% is leverage, money that does not exist

darteaus's picture

PMI, but how does one buy $1M of stock w/$100K without someone lending you the money?

The seller surely did not surrender the $1M of stock w/o collecting $1M, and you only have $100K, so somebody came up w/$900K to seal the deal, right?

ekm's picture

primary dealers can

THX 1178's picture

What happens when it disappears into nothing though?

ekm's picture

$1million of securities will be fire sold to make up for $900k the bank "loaned" you out of nothing.


It's a collateral based system.

Assuming you had 10k shares valued @ $10 each, now those shares after the fire sale are worth $1/each.

$9/share disappeared



Value of collateral is what matters.


For instance: If you have 1lbs of oranges worth $10/lbs, then you have $10

But if oranges go half rotten and you can sell them for $2/lbs, then you have $2.


Orange is the collateral

Value is what others are ready to pay for it




THX 1178's picture

If those securities are equity based: big downward pressure on stock market

If debt based, big spike in yields?

Big feedback loop crash?

ekm's picture

Buying a house is the same thing

Assuming you buy $300k house but put down only $10k.

The bank "lent" you the difference to be paid in 30 yrs.


The bank let you nothing, they just make the credit out of nothing, but they expect you to pay cash biweekly. It's leverage.