Regulations mucking up the banking industry again.

[Laize]

Source

For anyone who doesn't understand banking jargon, the Federal Reserve is effectively changing what banks are allowed to put towards their capital requirements. This is to implement the global banking standard known as Basel III.

Basically, the regulation requires banks to hold about 30-50% more capital on hand than they currently do. The goal is to turn "too big to fail" into "too strong to fail".

That's a fine goal, but forcing banks to have more capital on hand is going to have some pretty bad consequences for the rest of us.

1) It's been shown time and again that regulation costs get passed on to consumers. In this case, we can all expect higher interest rates on loans while our savings and CD rates go nowhere. In this case, banks will have less money to lend out but will be attempting to make the same profits.

2) It doesn't address the source of the problem. The thing that brought big banks to their knees wasn't undercapitalization. Instead it was the fact that regulatory pressures were pushing them to avoid risk. So instead, banks would invest in the lowest risk with the highest return, even if the risk was actually unknown.

In short, we can all expect higher interest rates on our loans with nothing actually being accomplished.

Oh yeah, and this measure is also expected to slow GDP growth by up to .15%.

[vaajtswv]

So instead, banks would invest in the lowest risk with the highest return, even if the risk was actually unknown.

How can something with lowest risk has the risk to be unknown?

On an aside, the banks put themselves in a position where they need to be regulated. They kept pushing the bubble until it did burst.

As for consumer eating the regulation cost. Aren't consumer already eating the cost with the bail outs? All that money that went to banks are tax money, which comes from people, who just happens to be consumers. And now we're looking higher taxes thanks to banks (among other items).

[Laize]

How can something with lowest risk has the risk to be unknown?

Mortgage Backed Securities were rated AAA (highest) by rating agencies when the real risk was entirely unknown due to the outrageous amount of work it would have taken to analyze thousands of mortgages in each security. Just as an example.

[Vesci]

Good. Maybe people will start saving again instead of borrowing everything. It's the false income (credit) and extended borrowing that banks have practiced for the last 20-30 years that got us into the mess we're in now. Screw the bank, own your own things.

[Flextt]

I dont have any problem with increasing regulation on banks since they have been virtually nonexistent and brought us close to doom. Politicians have failed to learn their lessons after the crisis. Besides, increasing the capital reserves of banks helps regulating inflation (less money from central banks reaches customers), which is currently being fueled to help the economy.

[vaajtswv]

Mortgage Backed Securities were rated AAA (highest) by rating agencies when the real risk was entirely unknown due to the outrageous amount of work it would have taken to analyze thousands of mortgages in each security. Just as an example.

So it's not a case of risk, they were just lazy.

[Flextt]

So it's not a case of risk, they were just lazy.

My economics professor gave an interview in 06 and warned about the dimensions of the bubbles that were being created. Famous German former secretary of finance Oskar Lafontaine even in 05. The information was there. It was simply being ignored due to greed and convenience.

[Laize]

Good. Maybe people will start saving again instead of borrowing everything. It's the false income (credit) and extended borrowing that banks have practiced for the last 20-30 years that got us into the mess we're in now. Screw the bank, own your own things.

Can't just blame it on the banks. It's caused by consumers borrowing money they don't have as well.

All these regulations are going to do is make life more expensive for people who borrow for legitimate reasons.

[vaajtswv]

My economics professor gave an interview in 06 and warned about the dimensions of the bubbles that were being created. Famous German former secretary of finance Oskar Lafontaine even in 05. The information was there. It was simply being ignored due to greed and convenience.

The sad part is everyone saw it coming. All I talked about was waiting for the burst before buying house in 06. Now I'm house shopping.

[Brett Skullcrack]

We've seen that an unregulated financial industry is a threat to the whole society. There is simply too much greed and too many people willing to take a huge bonus payout this year even if it means the bank goes under the next year. Just look at what happened in commodities markets with deregulation.

---------- Post added 2012-02-13 at 06:55 PM ----------

Can't just blame it on the banks. It's caused by consumers borrowing money they don't have as well.

That's true, but it was the lenders who had the professionals whose job it supposedly was to calculate how much money the bank could lend to particular individuals safely. Of course, when you get a bonus for every mortgage sold and get to sell the risk onto others, it makes no difference whether the person taking the mortgage can actually afford it.

[Laize]

So it's not a case of risk, they were just lazy.

Not exactly. The MBSs were further split up into tranches. The lowest tranches got the highest returns, if the homeowners didn't default. The highest tranches got paid even if huge portions of the mortgages defaulted. These tranches were rated AAA, but the extent of mortgage defaults went far beyond what was necessary to keep even their payments up.

The rating agencies were also under considerable pressure. You really have to understand how the rating agencies work and get paid to understand why

---------- Post added 2012-02-13 at 07:01 PM ----------

We've seen that an unregulated financial industry is a threat to the whole society. There is simply too much greed and too many people willing to take a huge bonus payout this year even if it means the bank goes under the next year. Just look at what happened in commodities markets with deregulation.

The less regulation the better. The problem with what happened was that these banks were essentially bailed out of everything. If there were a real threat of "going out of business" and "losing everything" from the bankers' perspective, there would have been considerable pressure to play safer instead of fast and loose.

I'm also wondering what you're talking about with the commodities market.

[sephrael]

Source

Basically, the regulation requires banks to hold about 30-50% more capital on hand than they currently do. The goal is to turn "too big to fail" into "too strong to fail".

Oh yeah, and this measure is also expected to slow GDP growth by up to .15%.

When you see that the banks are currently maintaining capital ratios of like 4%, this number-dropping of "30%-50%" becomes a bit of a stretch to seem outrageous.

Similarly, you spin the effect of these regulations on the GDP as a bad thing. If you actually read into the cited sources on Wikipedia, you see that a) the effect is negligible ("Tougher global bank capital rules will barely hinder economic growth, said a study on Wednesday, casting doubt on claims from the banking sector they would result in a credit squeeze that would derail economic recovery." - Reuters) and b) that literally nobody outside of the banking system had much criticism for it.

[Flextt]

The less regulation the better. The problem with what happened was that these banks were essentially bailed out of everything. If there were a real threat of "going out of business" and "losing everything" from the bankers' perspective, there would have been considerable pressure to play safer instead of fast and loose.

I think that's the funny thing. It's like with keysianism. People like deficit spending. It kinda wins presidencies. But cutting spending in good times and increase taxes? NO WAI!
Same thing with Monetarism. First, we erase regulation after regulation. Then huge banks crash. But hey, the market should heal itself, am I rite? Why not let them fail and see what happens? Because no one wants to take that risk, even though the mantra is: Let the market make the decisions, it will turn out just fine.
Half-assed politics in every direction will always backfire. Right now, economical policies are a bastard. Regulate nothing, if something happens, deficit spending.

[Laize]

When you see that the banks are currently maintaining capital ratios of like 4%, this number-dropping of "30%-50%" becomes a bit of a stretch to seem outrageous.

No banks in the US maintain capital ratios of 4%. Basel II (The current regime) required a minimum of 9.5% capitalization with 150% of that number being what was recommended. Most banks have about a 13.5%-14% capitalization.

The new regime will place minimum capitalization around 13% so new capitalization numbers will be about 19.5-20% of risk-weighted assets.

Similarly, you spin the effect of these regulations on the GDP as a bad thing. If you actually read into the cited sources on Wikipedia, you see that a) the effect is negligible ("Tougher global bank capital rules will barely hinder economic growth, said a study on Wednesday, casting doubt on claims from the banking sector they would result in a credit squeeze that would derail economic recovery." - Reuters) and b) that literally nobody outside of the banking system had much criticism for it.

a) because .15% isn't that much. At least it's not when the economy is growing at 3% and 4% per year. When our economy is growing at half that rate, .15 percentage points is pretty big hit.

b) nobody outside the banking sector has much criticism for it because they either A) don't know how banks work or B) don't even know what the Basel committee is or does.

[Deleted]

Lafontaine's backsotry is rather interesting. He has for a long time been one of the few politicians with a good sense on economics. But he lost the election int he early 90s, where he was the main candidate, against Kohl after he told a realistic view of the unification process, yet the people choose to believe Kohl's lies about "blossoming landscapes". Later he came to power as second powerful man under chancellor Schröder, who despite being a nominal social democrat, won on a campaign of deregulation and libertarian policies. Lafontaine warned about the consequences of this politics, but never managed to bring his point around and stop Schröder's plans. He resigned in desperation, and Schröder was free to push for deregulation, especially for banks and hedge funds with the new finance secretary Eichel. Taxes were cut for the rich, raised for the poor. Industry and finance were given free reign, and a huge bureaucracy installed to push around unemployed people and remove their dignity.

Libertarianism, Conservatism at its finest, coming from the "left". Again, history showed that Lafontaine was correct. But people don't like the guy who says "see, I knew it better than you". Schröder and the others from his gang now reap the fruits of their work as CEOs and other positions at the companies that profited most. No doubt the seats are already prepared for Merkel and her band.

The only hope we have is that people start to look behind the libertarian pseudo-religion, and expose their dogmata and word-bending as the fraud it is.

[Deleted]

Can't just blame it on the banks. It's caused by consumers borrowing money they don't have as well.

All these regulations are going to do is make life more expensive for people who borrow for legitimate reasons.

Say what? Every credit is "borrowing money that you don´t have" otherwise you wouldn´t need to do it, would you? I don´t know who brainwashed you, the OP, but its amazing how backwards your argument is.

The banks didn´t buy the Mortgage Backed Securities without realizing, that no one could possibly know how probable defaults were. They didn´t care, because they had insured themselves for these losses. That was the whole point of this crisis: it didn´t matter if the loans anyone gave customers or bought in packages would get paid back or not - they insured themselves against any losses. The problem is that someone - in this case the big "insurers" like AIG - were the last ones to hold the ticking bombb in their hand and it all fell apart from there.

Its ridiculous to think that increasing the capital requirements from ~4% to 6-8% will do anything bad except reducing the incredible profits that banks are used to making (which don´t benefit anyone except the banks themselves). Btw, the numbers you have include not only capital oft he bank, they include long-term debt claims and stuff like that, too, which can turn out to be worth nothing. Its sick and stupid what banks are allowed to call "their capital".

The less regulation the better. The problem with what happened was that these banks were essentially bailed out of everything. If there were a real threat of "going out of business" and "losing everything" from the bankers' perspective, there would have been considerable pressure to play safer instead of fast and loose.

You don´t know what you are talking about. This would´ve meant tens of millions of lost jobs all over the world, civil unrest, companies breaking down etc., completely obliterating the real economies, i.e. companies that do produce something or provide services.

Also, GDP growths don´t mean jack-shit. Its always a question what is actuall growing and who is benefitting from it.

[Wells]

Mortgage Backed Securities were rated AAA (highest) by rating agencies when the real risk was entirely unknown due to the outrageous amount of work it would have taken to analyze thousands of mortgages in each security. Just as an example.

If you think the bank executives didn't know how risk the practice was I have a beach front house in Kansas to sell you.

[vaajtswv]

Not exactly. The MBSs were further split up into tranches. The lowest tranches got the highest returns, if the homeowners didn't default. The highest tranches got paid even if huge portions of the mortgages defaulted. These tranches were rated AAA, but the extent of mortgage defaults went far beyond what was necessary to keep even their payments up.

The rating agencies were also under considerable pressure. You really have to understand how the rating agencies work and get paid to understand why

No. They didn't do their homework. Job losses were a major contributor to the burst. The banks should have noticed the trend and erred on caution. instead, they kept passing out loans until enough people lose their job and had to default on loans and mortgages.

[Shamanberry]

The whole "too big to fail" problem wasn't one that's a problem because it had to be prevented, but because it was allowed to exist. We HAD to bail out the banks - even as a hardcore fiscal conservative, I agree with that.

The primary reason it was allowed to exist, though, is due to over-regulation. Regulations are put in place, originally, with good intentions - but over time, the regulation agencies become more and more in bed with the industry they're trying to regulate. As a result, those with a lot of money and power get exemptions from unfriendly regulations, and get to write regulations that benefit them over others in the industry. This leads to smaller, less well-connected entities to become even less significant.

Regulations are good insofar as they protect consumers, but once they set one toe out of that line, it snowballs into ... well... what we have today. What people don't tend to understand is that there are good regulations and bad regulations. Good regulations are things like "you can't promise one thing and deliver another", or "you have to be able to back up loans you make". Bad regulations are ... well... just about everything else. However when you talk about "deregulation", people assume you're talking about getting rid of consumer protections and letting big evil corporations control everything -- when in truth, the point of deregulation is to take power away from the government to make deals with big evil corporations and allow small businesses to thrive.

No. They didn't do their homework. Job losses were a major contributor to the burst. The banks should have noticed the trend and erred on caution. instead, they kept passing out loans until enough people lose their job and had to default on loans and mortgages.

It's worth pointing out as well that the reason they continued passing out loans is because the government forced them to via regulations. Even if they wanted to be responsible and deny loans to people that had no hope of paying them back, the government had a program in place that they wanted to be able to claim was helping the disadvantaged buy homes -- so they told banks "don't deny the loans, we'll back you up if they default".

Housing bubble burst, and we all remember what happened from there. It's partly the fault of the people that bought them, thinking the government was giving them a free house, partly the fault of the government for not stopping the program in its tracks, but the largest part of the fault comes from the federal banks and mortgage giants that could have stopped it at any point by just saying they weren't going to buy the distressed mortgages anymore -- but didn't until the world came crashing down around them. Other banks really aren't at fault at all - all they did was follow the rules as were given to them.

[sephrael]

No banks in the US maintain capital ratios of 4%. Basel II (The current regime) required a minimum of 9.5% capitalization with 150% of that number being what was recommended. Most banks have about a 13.5%-14% capitalization.

The new regime will place minimum capitalization around 13% so new capitalization numbers will be about 19.5-20% of risk-weighted assets.

Are you talking about CAR or capitalization? Because it is very clearly stated that Basel II regulations stipulate a minimum of 4% T1 capitalization and 8% total capitalization. It recommends 8% and 12% for the definition of "well-capitalized".

Under Basel III, regulations stipulate a minimum of 6% T1 capitalization and 8% total capitalization. It also requires a conservation buffer of 2.5% and based on certain criteria a countercycle capital buffer of 2.5%.

I don't see these numbers that you are putting forth.

a) because .15% isn't that much. At least it's not when the economy is growing at 3% and 4% per year. When our economy is growing at half that rate, .15 percentage points is pretty big hit.

b) nobody outside the banking sector has much criticism for it because they either A) don't know how banks work or B) don't even know what the Basel committee is or does.

But nobody with any kind of credentials agrees with your argument on point A with the exception of bankers, and your opinion on point B is unsubstantiated.