Pages

Monday, December 19, 2011

Banks 'lose' battle over Basel in order to win war to retain opacity

The Wall Street Journal ran an article on how US banks are losing the battle over the adoption of the Basel III capital requirements including the requirement for larger banks to hold additional capital.

However, this 'loss' allows them to continue to win the war to retain opacity.

Regular readers know that Basel III capital requirements are completely meaningless as they are easily manipulated by the banks and the capital requirements were always intended to allow the banks to increase their leverage and therefore the return on equity that banks might generate.

In short, the Basel capital requirements are regulators doing everything in their power to promote the interests of the banks including defending opacity.

As an example of defending opacity, let's compare Basel I to Basel III.  According to the Bank of England's Andy Haldane, Basel I takes 6 simple calculations to determine the capital ratio while Basel III takes upwards of 6 million calculations.

To an outsider, it appears that Basel III is dramatically more opaque and far less informative.  This is not surprising given that Basel III is the result of a negotiation between the banks and their regulators.

Both parties perceive they benefit from opacity.

The banks perceive they benefit because with Basel III, they can continue to take excessive amounts of risk that market participants cannot see.  Even better, they get to represent themselves as being less risky so that they can access funds for rates far below what a fully informed market would charge for their risk.

Regulators perceive they benefit because the market is still dependent on them to assess and communicate the risk of the banks.  The regulators get to keep their ability to gamble with financial stability as well as to leave through the revolving door to a high paying job with the banking industry.

Naturally, the preservation of opacity creates losers.  Those losers are every other market participant.

Compare and contrast our current system of banks and regulators who create meaningless Basel capital requirements versus a financial system for the 21st century that is based on ultra transparency (banks are required to disclose on an on-going basis their current asset, liability and off-balance sheet exposure detail).

Which system has already shown itself to be prone to crashes and exploitation by the bankers?

Finally, is there anyone besides your humble blogger who keeps wondering why if capital is there to absorb losses, banks haven't used it in the current crisis?  Why are regulators following a policy of regulatory forbearance that allows banks to engage in 'extend and pretend' on their loans rather than requiring losses be realized?

The Federal Reserve is expected to embrace a new global framework that requires giant financial institutions to hold extra capital, said people familiar with the situation. 
The central bank's decision to accept the rules laid out by regulators in Basel, Switzerland, as part of a draft proposal that could come before Christmas is a defeat for giant U.S. banks that argued the guidelines needn't be so strict. They contended the Basel approach could prompt them to reduce lending and hurt the economy. 
At the same time, it isn't clear the bigger capital buffers will accomplish what regulators set out to do in the Dodd-Frank financial overhaul and other recent moves: end the "too big to fail" syndrome that paved the way for the government bailouts of the 2008-09 financial crisis. 
While big U.S. banks that are asked to maintain higher cushions could be forced to raise prices on certain transactions to compete with rivals, they also could benefit from lower funding costs if they are perceived to be likely recipients of government aid in a market shock or steep downturn. 
Even after the release, banks won't know exactly how much extra capital they will be required to hold as a protection against losses. Basel regulators last month designated 29 so-called systemically important firms—including eight in the U.S.—but didn't say just how much capital each bank would be required to carry.... 
Banks initially were united in their opposition to the extra surcharge, but now some appear happy enough to just not be in the highest bucket. "Nice to be us," said a top executive at one major U.S. bank that isn't expected to share the top category with J.P. Morgan Chase. "I would prefer to be at the kids' table." 
The Fed's embrace of the Basel surcharge is expected to come as part of a draft of new rules for U.S. firms that are considered by regulators to be big enough to pose a risk to the financial system. 
The proposed rules, required by the Dodd-Frank financial law, are expected to detail how much extra capital these firms must hold as a buffer against losses, the cash they must keep around to reduce their need to tap volatile funding markets, and how much money they can pour into any sort of investment.

No comments:

Post a Comment