Friday, Dec 18, 2009

Basal Reforms

BBC: New ice age for bankers

The Basel reforms would make it prohibitively expensive for banks to do all that wheeling and dealing in securities and derivatives that yielded bumper profits and bonuses in the boom years and brought the world to the brink of depression last autumn. The consequences would be profound not only for the banking industry but also for the economy - which is why they will be phased in over years.They are likely to mean that far less credit to households and non-financial businesses will be provided by conventional banks, because the cost to banks of providing credit in any form will rise.

Posted by cat and canary @ 10:41 AM (3205 views)
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1. cat and canary said...

Bank shares hit, as "the international rulemaking body for the banking industry, the Basel Committee on Banking Supervision, has proposed a series of reforms that would change the nature of banking in a profound way....its reform paper, "Strengthening the resilience of the banking sector", .... would turn a particular kind of high-paying, securities trading, global megabank - the institutions that created and defined the boom-and-bust conditions of the past decade - into an endangered species."

Friday, December 18, 2009 10:44AM Report Comment

2. icarus said...

"There are also likely to force a mass exodus from banks of...traders and financial engineers....(who may) create all manner of new-fangled financial institutions, which won't be banks, won't take retail deposits, won't be banks in a technical sense and won't be subject to such onerous regulation and supervision".

What's to prevent banks themselves setting up such a shadow banking system, with hedge-fund subsidiaries, SIVs, conduits etc.? They did this last time around.

Friday, December 18, 2009 12:30PM Report Comment

3. mark said...

the only people this will hurt is the honest everyday public

banks over the past few years merely reacted to over priced assets by lending more money, after all if they dont lend money they would lose money, so they were kind of forced into a catch 22, i bet you will find that the government actively encouraged banks to take risks more than perhaps they should have done..

also what happens to the economy if no-one including banks takes risks? we would all be unemployed

Friday, December 18, 2009 12:50PM Report Comment

4. cat and canary said...

icarus, yeah, im still trying to get my head round this. The basal report is 80 pages long. Presumably, these reforms only apply to banks which are in retail? Which in turn boils down to a separation of investment from retail banking after all?!

Friday, December 18, 2009 12:51PM Report Comment

5. icarus said...

In addition to the institutional side of shadow banking there were over-the-counter (OTC) credit derivatives (CDOs and CDSs) which also enabled banks to expand leverage to a greater extent than regulations allowed (because they were OTC and shadowy they didn't require the normal amount of collateral to insure their credit operations). There doesn't seem to be anything in the report about this either.

Friday, December 18, 2009 12:52PM Report Comment

6. cat and canary said...

few quotes from the rpt...

> under the current standard, banks could hold as little as 2% common equity to risk-based assets before applying regulatory adjustments.

> As a consequence, it has been possible for some banks under the current standard to display strong Tier 1 ratios with limited tangible common equity. However, the crisis demonstrated that credit losses and writedowns come out of retained earnings, which is part of banks’ tangible common equity base. It also revealed the inconsistency in the definition of capital across jurisdictions and the lack of disclosure that would have enabled the market to fully assess and compare the quality of capital between institutions.

> (propsed capital ratios)... if a bank suffers losses such that its capital level falls to a level above the minimum requirement equal to 30% of the size of the capital conservation range then the bank would be required to conserve 80% of its earnings in the subsequent financial year (ie payout no more than 20% in terms of dividends, share buybacks and discretionary bonus payments). If the bank wants to make payments in excess of the constraints imposed by this regime, it would have the option of raising capital in the private sector equal to the amount above the constraint which it wishes to distribute. This would be discussed with the bank’s supervisor as part of the capital planning process.

Friday, December 18, 2009 01:17PM Report Comment

7. mountain goat said...

Icarus - no problem with risky financial wizardry as long as it doesn't threaten the economy. Banks are considered too important to fail and so should stay safe.

Friday, December 18, 2009 03:55PM Report Comment

8. Grizzley Bear said...

Well I just said up yours to corrupt banks again, by transferring money, in a bank, into Allocated Silver Bullion.

I bet I'll need all the profit I can get, to offset carbon taxes, if this AGW nonsense continues.

Friday, December 18, 2009 05:22PM Report Comment

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