Monday, September 13, 2010
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 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:
“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.”
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:
Yves Smith notes:
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.
Karl Denninger writes:
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].
Even CNBC is skeptical:
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.
The bottom line: capital requirements might be helpful if other - more fundamental - reforms are implemented. But unless core reforms are implemented, nothing will change.
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.