G20 - Increase Bank Capital Ratios

[Traktion]

I just watched the press conference for the G20 with Darling and then Geithner. It seems all governments have agreed that capital requirements must be increased, to stop the banks from destabilizing the economy. They now have to agree how much, but this is an important development. This is the signal I was waiting for.

I have been banging on for a while about how QE isn't a bad thing, as it recapitalises the banks, as long as they increase the reserve ratios at the same time. It now seems certain that the capital requirements will be increased, to stop the banks using so much leverage.

As the US already has 10% requirements, with the UK having 3% (volunteered), it will be interesting to see what the new capital requirements will be.

What does this mean for house prices? In the medium/long term, it will mean that banks can't lend out so much money, which will put a cap on house prices automatically, which will prevent asset bubbles from inflating so large. In the short term, it depends how much capital will be pumped in, in total, and where the capital requirements will be set. As prices are still unaffordable compared to wages and reasonable multiples (read: with stricter reserve capital requirements), I would imagine that prices will be forced much lower yet. Has the government realised that they can't and shouldn't try to prop them up?

What does this mean for the business cycle? With the banks able to impose less influence on the broad money supply, they will be unable to inflate such large credit bubbles, curtailing the damage asset bubbles can cause. This means smaller booms and busts and a more sustainable, steady economy. This is great news for the economy as a whole, as it will encourage less speculative investment, instead (hopefully) fuelling more business investment.

Is this the beginning of the end of the banks' influence over the money supply? If the business cycle stabilises substantially, will the growing calls for fractional reserve banking to be curtailed be heard? Interesting times... at least it appears we are heading in the right direction.

P.S. There was some talk about bonuses too, but imo it is a side show - this is the interesting/important news.

[D.C.]

When Darling as going around trying to get banks to lend more the general response seemed to be 'we can either repair balance sheets OR lend, not both.'

There has also been discussion on making large banks hold higher reserves than small banks but in this country we don't have any 'small banks' so I'm guessing this means a lot of pain for us and no lending for quite a while.

[oracle]

no problem with the banks recapitalising.

..as long as they understand that the capital comes out of their own pockets.

taxpayer milch-cow says noooooo.

farmer will get swift kick in the nads if he squeezes again.

[DabHand]

They are all insolvent. Its like washing the feet of a corpse.

[Democorruptcy]

Someone has a got a big hook in their mouth.

[Traktion]

They are all insolvent. Its like washing the feet of a corpse.

I'm not saying the economy is going to bounce straight back, just that it will put the breaks on HPI now and in the future. Mortgage multiples will have to fall and there will be less profit for bonuses too. In that respect, they are at least tackling the problem (too small capital ratios), rather than the symptoms (large mortgages, bonuses). I am as cynical as the next person about the governments, but this is good news.

For the economy in the short term, I can't see how we are going to have a meaningful recovery until the private debt is repaid. To this end, we are either in for a decade or more of slow, grinding decline, or a sharper, deeper decline. Decline it will though - we are too expensive to compete globally - and we would do well to have the latter and allow a bank or two more to fail (imo).

[Bloo Loo]

They had capital requirements, B4 the crash....they just used Off Balance sheet vehicles to avoid the limit.

[Guest absolutezero]

Higher interest rates on deposits (and therefore lending) to encourage saving then?

[Three Pint Princess 2]

The U.S. government on Wednesday relaxed capital requirements at Fannie Mae and Freddie Mac as part of a plan to inject an additional $200 billion (euro127.4 billion) of financing for home loans.

Northern Rock is estimated to have lost more than £500m in the past six months, putting it in breach of regulatory rules even after they were relaxed for the nationalised lender last year.

http://www.telegraph.co.uk/finance/newsbys...-than-500m.html

Not sure I understand when the regulatory requirements are relaxed if they breach them?

These are relaxed rules a $800 Billion, near $Trillion total leveraged UK & USA lenders are operating under, right now, they have perhaps a few 10s of billions in regulatory terms.

Edited September 5, 2009 by Three Pint Princess 2

[Flatdog]

I just watched the press conference for the G20 with Darling and then Geithner. It seems all governments have agreed that capital requirements must be increased, to stop the banks from destabilizing the economy. They now have to agree how much, but this is an important development. This is the signal I was waiting for.

I have been banging on for a while about how QE isn't a bad thing, as it recapitalises the banks, as long as they increase the reserve ratios at the same time. It now seems certain that the capital requirements will be increased, to stop the banks using so much leverage.

As the US already has 10% requirements, with the UK having 3% (volunteered), it will be interesting to see what the new capital requirements will be.

What does this mean for house prices? In the medium/long term, it will mean that banks can't lend out so much money, which will put a cap on house prices automatically, which will prevent asset bubbles from inflating so large. In the short term, it depends how much capital will be pumped in, in total, and where the capital requirements will be set. As prices are still unaffordable compared to wages and reasonable multiples (read: with stricter reserve capital requirements), I would imagine that prices will be forced much lower yet. Has the government realised that they can't and shouldn't try to prop them up?

What does this mean for the business cycle? With the banks able to impose less influence on the broad money supply, they will be unable to inflate such large credit bubbles, curtailing the damage asset bubbles can cause. This means smaller booms and busts and a more sustainable, steady economy. This is great news for the economy as a whole, as it will encourage less speculative investment, instead (hopefully) fuelling more business investment.

Is this the beginning of the end of the banks' influence over the money supply? If the business cycle stabilises substantially, will the growing calls for fractional reserve banking to be curtailed be heard? Interesting times... at least it appears we are heading in the right direction.

P.S. There was some talk about bonuses too, but imo it is a side show - this is the interesting/important news.

Good analysis...

[interestrateripoff]

They had capital requirements, B4 the crash....they just used Off Balance sheet vehicles to avoid the limit.

Perhaps now they need to create off off balance sheets?

[Traktion]

They had capital requirements, B4 the crash....they just used Off Balance sheet vehicles to avoid the limit.

I would assume this will be clamped down on as well.

Also, the UK had very low requirements - so low that they were agreed on voluntarily (3% was the pre crunch average)!

[Sybil13]

I just watched the press conference for the G20 with Darling and then Geithner. It seems all governments have agreed that capital requirements must be increased, to stop the banks from destabilizing the economy. They now have to agree how much, but this is an important development. This is the signal I was waiting for.

I have been banging on for a while about how QE isn't a bad thing, as it recapitalises the banks, as long as they increase the reserve ratios at the same time. It now seems certain that the capital requirements will be increased, to stop the banks using so much leverage.

As the US already has 10% requirements, with the UK having 3% (volunteered), it will be interesting to see what the new capital requirements will be.

What does this mean for house prices? In the medium/long term, it will mean that banks can't lend out so much money, which will put a cap on house prices automatically, which will prevent asset bubbles from inflating so large. In the short term, it depends how much capital will be pumped in, in total, and where the capital requirements will be set. As prices are still unaffordable compared to wages and reasonable multiples (read: with stricter reserve capital requirements), I would imagine that prices will be forced much lower yet. Has the government realised that they can't and shouldn't try to prop them up?

What does this mean for the business cycle? With the banks able to impose less influence on the broad money supply, they will be unable to inflate such large credit bubbles, curtailing the damage asset bubbles can cause. This means smaller booms and busts and a more sustainable, steady economy. This is great news for the economy as a whole, as it will encourage less speculative investment, instead (hopefully) fuelling more business investment.

Is this the beginning of the end of the banks' influence over the money supply? If the business cycle stabilises substantially, will the growing calls for fractional reserve banking to be curtailed be heard? Interesting times... at least it appears we are heading in the right direction.

P.S. There was some talk about bonuses too, but imo it is a side show - this is the interesting/important news.

I remember reading an article in June that said:

Ray Boulger, of mortgage broker John Charcol, said the increase in price had been driven by a lack of competition and by new rules under which lenders have to set aside more capital to cover high loan-to-value mortgages. "The cost to the lender of making one 90% LTV loan available can be four or five times the cost of offering a mortgage at 60% LTV," he said. "We're in a situation where the more lending a lender does at 90% the less lending they are able to do overall."

At the time that I quoted this, someone on HPC linked it to an article from 2003 Mortgage lending ranked low -risk despite crash fear, and asked "how much capital do the banks have to put aside"? However, nobody ever replied.

Rightmove's latest HPI said:

Future price and transaction growth is now controlled by the bottleneck of mortgage availability. This is unlikely to change for years to come, with the Centre for Economics and Business Research (CEBR) forecasting that mortgage application levels will recover slowly and remain well below the levels seen in the early part of this decade as far ahead as 2013. Even in 2013 the CEBR state that numbers will still be 24% below 2006 levels. This may well reflect a paradigm shift in access to mortgage lending. While HSBC is the only major lender to have taken a more proactive stance and increased its market share, its reported average loan-to-value of circa 50% on new mortgage lending is a perfect illustration of the new era of both caution and cherry picking.

Shipside adds: “Lenders are looking to remove as much risk as possible from their mortgage book. While the government’s left-hand is waving them on to lend to more home movers and small businesses, the right-hand is effectively flagging them down again by urging lenders to re-build balance sheets and improve capital adequacyâ€.

None of it sounds like a recipe for house price increase does it?

The original poster of this thread asked: "Has the government realised that they can't and shouldn't try to prop them up?"

It would be nice to think that the government had finally considered what the BOE official said back in March when he warned Darling Don't Stop the Housing Crash

[mfp123]

the system is broken now.

the irony is that surely it just means that bank will be classed as insolvent far far quicker if things go wrong.

and when things do go wrong whats going to happen? in the uk, the big 4 banks are not going to go bust , they will just get bailed out again so realistically theyre talking out of their arses.

basically theyre saying were going to create rules to stop things getting out of hand, but if things do get out of hand the rules dont apply, so ultimately whats the point...

no one knows what theyre doing anymore. the problem is just too big to control.

Edited September 5, 2009 by mfp123

[grumpy-old-man-returns]

They are all insolvent. Its like washing the feet of a corpse.

I like that one Dab.

[bill still]

Right. The 10% reserve in the US was a well known joke. Reserve requirements were not a force in any way.

[bill still]

Maybe they could count off balance sheet losses as a national asset and monetize it?

Perhaps now they need to create off off balance sheets?

[mfp123]

and a further sign that politicians dont know what theyre doing, they keep talking about the need for banks to increase lending , but also want banks to restrict lending by having bigger capital reserves...???

its as though they can only see individual problems, trying to put out fires one at a time and no one is able to look at the whole picture.

cause and effect.

by solving one problem you create problems elsewhere but they just dont see that.

take for example the cash for clunkers deals around the world. politicians are claiming that it is a big success. is it really?

essentially, tax payers who dont want cars will be subsidising cheap cars for those that do... whats the point in that?

[Traktion]

and a further sign that politicians dont know what theyre doing, they keep talking about the need for banks to increase lending , but also want banks to restrict lending by having bigger capital reserves...???

its as though they can only see individual problems, trying to put out fires one at a time and no one is able to look at the whole picture.

cause and effect.

by solving one problem you create problems elsewhere but they just dont see that.

take for example the cash for clunkers deals around the world. politicians are claiming that it is a big success. is it really?

essentially, tax payers who dont want cars will be subsidising cheap cars for those that do... whats the point in that?

At least they seem to be on the right track. I'm not fighting their corner, but it is encouraging to see them at least talking about the problem being capital reserves.

Re the cash for clunkers, I think they were hoping it would just be a small recession and it would help bridge the gap. It seems to now be dawning that no VAT cut, no cash for bangers etc is going to be enough - it is now obvious (or at least I hope it is!) that the gap is in fact a chasm, which needs a whole different approach.

[Pindar]

How about just imposing 3 X income on mortgages.

[mfp123]

At least they seem to be on the right track. I'm not fighting their corner, but it is encouraging to see them at least talking about the problem being capital reserves.

Re the cash for clunkers, I think they were hoping it would just be a small recession and it would help bridge the gap. It seems to now be dawning that no VAT cut, no cash for bangers etc is going to be enough - it is now obvious (or at least I hope it is!) that the gap is in fact a chasm, which needs a whole different approach.

indeed it is a good thing but i just get the sense that there is a breakdown in the markets now.

now that theyve broken the rules e.g central banks lending money directly to businesses, which is ridiculous, but now its accepted as normal, and governments subsidising the purchase of cars, theyre just making it up as they go along now.

another timebomb is brewing up.

[Traktion]

How about just imposing 3 X income on mortgages.

While this may help keep the lid on mortgage rates, it is still treating the symptom, rather than the cause. The capital reserve requirements (and indeed the argument for 100% reserves) cuts to the heart of the problem. If you cap the capital ratios (and ensure off balance sheet foolery isn't allowed), the banks will implicitly have to lend smaller mortgages and pay less bonuses.

[porca misèria]

The U.S. government on Wednesday relaxed capital requirements at Fannie Mae and Freddie Mac as part of a plan to inject an additional $200 billion (euro127.4 billion) of financing for home loans.

Would it not be fair to say the US is different, in that it's had a real crash? At least in parts. When you have large areas of $5k houses, you're clearly out of the bubble, and efforts to stabilise the market may have ceased to be a hugely expensive exercise in Denial.

Northern Rock is

a focus for Denial, and for ensuring a generational decline in our economy.

[porca misèria]

essentially, tax payers who dont want cars will be subsidising cheap cars for those that do... whats the point in that?

Backhanders, no doubt.

Oh, and an industry with a big presence in lots of midlands marginal constituencies, and with a lobby so immensely powerful as to secure taxpayer bailouts even when Mrs Thatcher was letting other lame ducks fail.

[D.C.]

indeed it is a good thing but i just get the sense that there is a breakdown in the markets now.

now that theyve broken the rules e.g central banks lending money directly to businesses, which is ridiculous, but now its accepted as normal, and governments subsidising the purchase of cars, theyre just making it up as they go along now.

another timebomb is brewing up.

The similarities between post USSR Russia and the present state of the US economy are too close for comfort.

The US now effectively has a command economy run by government & super rich, while the rest of the population scrabble around in desperation. Both have huge debts and military spending, the only difference seems to be Russia had a lot of family silver to sell, the US doesn't...