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Timm

G20 Calls For Better Capital Buffers At Banks

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http://www.ft.com/cms/s/0/49d4be54-9b12-11...&SID=google

European banks face pressure to issue far more shares in order to meet a tough new global regulatory framework outlined at the weekend by finance ministers of the G20 group of nations which calls for much bigger and better capital buffers against shocks, analysts warned on Sunday.

The move follows criticism that some banks have relied too heavily on complex securities that have proved poor defences against big losses.

Some banks have met up to more than half the existing regulatory requirements on capital buffers through the issuance of “hybrid†securities which are more like debt than equity, according to analysts. Huw Van Steenis, banking analyst at Morgan Stanley, said: “Over time this will reinforce banks raising more capital to replace government and other hybrids and reshape their balance sheet.â€

Hans Lorenzen, credit analyst at Citigroup, cited data from the International Monetary Fund showing that the average ratio of equity made up of issued ordinary shares to assets of European banks at the end of 2008 was 2.5 per cent against 3.7 per cent in the US.

The G20 meeting agreed three main points: banks must raise much more capital once the financial crisis has passed; complex financial institutions should develop “living wills†to plan for their unwinding; and banks should be required to retain some portion of loans they repackage and sell as asset-backed securities.

The group also made an implicit plea for banks to limit payouts to shareholders, saying: “We call on banks to retain a greater proportion of current profits to build capital, where needed, to support lending.â€

At first sight of the paper version, I thought this was vindication for Traktion, but googling to find the text, I found this instead, which sounds like something quite different:

http://www.finfacts.ie/irishfinancenews/ar...e_1017825.shtml

The Financial Times says some banks have met up to more than half the existing regulatory requirements on capital buffers through the issuance of “hybrid†securities which are more like debt than equity, according to analysts.

Huw Van Steenis, banking analyst at Morgan Stanley, told the FT: “Over time this will reinforce banks raising more capital to replace government and other hybrids and reshape their balance sheet.â€

Edited by Timm

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EDIT: Having read the second article more carefully, it backs up the FT. In fact, it appears to be talking about an unwinding of non capital based reserves, to be replaced with capital, rather than just an increase in nominal amounts.

Edited by Timm

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Following the bailout of many banks by governments during the financial crisis, there is now agreement that banks cannot henceforth rely on complex securities that have proved poor defences against big losses.

The Financial Times says some banks have met up to more than half the existing regulatory requirements on capital buffers through the issuance of “hybrid†securities which are more like debt than equity, according to analysts.

Huw Van Steenis, banking analyst at Morgan Stanley, told the FT: “Over time this will reinforce banks raising more capital to replace government and other hybrids and reshape their balance sheet.â€

The devil will certainly be in the detail, but I think the above depends on how you read it. If you include the paragraph above, it looks like these hybrid securities were what they were using pre crash, no?

Until we see hard numbers, it is difficult to get too excited, but if they are serious about restraining the banking sector, they will push for much bigger capital reserves. Even if they mop up the money poured in via QE, it would be a good start though and prevent future inflation caused by credit inflation.

I still maintain that they should have 100% reserves, as they ever should, and this need for an "elastic money supply" seems overstated - it seems to benefit the banks and those close to them at the expense of everyone else, imo. I am trying to learn a bit more about this at the moment, but the logical idea is to allow supply/demand for credit to dictate the interest rates and dampen the business cycle automatically.

EDIT: Looks like we reached the same conclusion re the logic on the second article after a re-read! :)

Edited by Traktion

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The devil will certainly be in the detail, but I think the above depends on how you read it. If you include the paragraph above, it looks like these hybrid securities were what they were using pre crash, no?

Until we see hard numbers, it is difficult to get too excited, but if they are serious about restraining the banking sector, they will push for much bigger capital reserves. Even if they mop up the money poured in via QE, it would be a good start though and prevent future inflation caused by credit inflation.

That seems like fair comment. There certainly seems to be consideration of the issues though, and the alternatives (unwinding QE etc.) do seem enormously difficult, especially in the UK, as hinted at by the ECB last week.

I still maintain that they should have 100% reserves, as they ever should, and this need for an "elastic money supply" seems overstated - it seems to benefit the banks and those close to them at the expense of everyone else, imo. I am trying to learn a bit more about this at the moment, but the logical idea is to allow supply/demand for credit to dictate the interest rates and dampen the business cycle automatically.

Do you mean 100% reserves of deposits, which would mean all deposits had to be retained, or 100% reserves against deposits, which would allow 50% of deposits to be lent, and 50% retained? I thought the second would generally be known as a 50% reserve.

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That seems like fair comment. There certainly seems to be consideration of the issues though, and the alternatives (unwinding QE etc.) do seem enormously difficult, especially in the UK, as hinted at by the ECB last week.

Yes and there is a net benefit from enforcing more capital requirements - it takes some of the power to inflate/deflate away from the banks. What better time to neuter the bankers than when they are struggling to remain solvent?

Do you mean 100% reserves of deposits, which would mean all deposits had to be retained, or 100% reserves against deposits, which would allow 50% of deposits to be lent, and 50% retained? I thought the second would generally be known as a 50% reserve.

I would argue for the former; why only allow banks to create half the money out of nothing? It is a bit like saying they can counterfeit only up to half of the money supply.

Banks could still lend (instead of extend credit), but they would do so at the permission of the saver and with their acknowledgement of the risks involved (ie. no loan is risk free). Savers would also have the opportunity to just practice safe banking (bailment), but they could risk some money for potential gain, by banks acting as brokers for lending.

If money wasn't so easy to counterfeit and the central bank wasn't there to allow a cartel of banks, we wouldn't even need to have this discussion - we would just have 100% reserves (ie. if we traded in commodities like gold, silver, goods etc).

I found this good snippet in regard to the need for "elastic" money:

Business and banking interests have always said that flexibility in money, an elastic money supply, is desirable. However, the history of the nineteenth century was that when money was tightest, from 1879 to 1900, progress was most rapid in technology and innovation. The three central banks that existed before the Fed, The Bank of North America, The First Bank of the United States and The Second Bank of the United States, were all associated with corruption, high inflation and economic dislocation.

(http://mitchell-langbert.blogspot.com/2009...ney-supply.html)

I am reading up on the pros/cons of an elastic money supply, but I get the feeling we have been duped by the bankers on this money - it appears to be for their benefit, not ours.

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Yes and there is a net benefit from enforcing more capital requirements - it takes some of the power to inflate/deflate away from the banks. What better time to neuter the bankers than when they are struggling to remain solvent?

It would of course give it to the polititians / central bankers instead. I suppose with a more stable system they might be less disposed to meddle, but Geithner's idea that capital requirements could fall in a downturn might signal that this is not the case.

I would argue for the former; why only allow banks to create half the money out of nothing? It is a bit like saying they can counterfeit only up to half of the money supply.

Banks could still lend (instead of extend credit), but they would do so at the permission of the saver and with their acknowledgement of the risks involved (ie. no loan is risk free). Savers would also have the opportunity to just practice safe banking (bailment), but they could risk some money for potential gain, by banks acting as brokers for lending.

If money wasn't so easy to counterfeit and the central bank wasn't there to allow a cartel of banks, we wouldn't even need to have this discussion - we would just have 100% reserves (ie. if we traded in commodities like gold, silver, goods etc).

I found this good snippet in regard to the need for "elastic" money: (http://mitchell-langbert.blogspot.com/2009...ney-supply.html)

I am reading up on the pros/cons of an elastic money supply, but I get the feeling we have been duped by the bankers on this money - it appears to be for their benefit, not ours.

As far as I can see, the main difference (aside from the inflationary aspect) of FRB from a full reserve system seems to be the fact that money does not remain stationary, but is used to create more credit*. This seems to effectively increase the velocity of the deposit, but that is probably more of a benefit to the bank who gets the lion's share of the interest, rather than society as a whole (or the depositor, unless the interest minus default-risk is more than the rate of inflation). But I'm on old ground here, where others know much more than me.

* yes: credit not loan. i stand corrected

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