Wednesday, June 15, 2011
Bankers from the Too Big to Fail Banks Twist the Facts to Justify Continued Speculation
Business Insider's Courtney Comstock has a great summary of former IMF chief economist Simon Johnson's evisceration of the giant banks' arguments regarding capital requirements:
[Johnson's] argument in a nutshell: bankers from the big 6 are outright lying so that they can continue to take on risk and keep their profitable trading operations running.
The issue: BASEL III regulations (originated in Switzerland, written by all of the world's Central Banks) require banks to have a capital requirement of 7% of equity, which is high enough as far as banks are concerned, but not high enough as far as U.S. regulators are concerned. U.S. regulators want to tack on an extra 3%. (Or maybe just 2% to 2.5%, according to a rumor on CNBC last week.)
Bankers do not want capital requirements to be too high for many reasons, a couple of which are laid out by a banker who emailed us here, and 4 others which Reuters detailed last week:
- “Holding capital hostage” will hurt the struggling economy because it will mean fewer loans at a time when lending is already depressed.
- Establishing huge capital buffers is an admission by regulators that last year’s Dodd-Frank financial overhaul does not accomplish its goal of reducing risk.
- If banks hold onto more capital and make fewer loans, borrowers will turn to the “shadow banking sector” – hedge funds, for example — which has little or no oversight.
- Tough standards in the United States would create a competitive disadvantage vis à vis other countries.
All of these are wrong, according to Simon Johnson, who blasted each of them using the following arguments:
- Capital requirements are a restriction on the liability side of the balance sheet — they have nothing to do with the asset side (in what you invest or to whom you lend).
- During the Dodd-Frank debates last year, [everyone] said it would be a bad idea for Congress to legislate capital requirements and should leave them to be set by regulators after Basel III... Now the banks want to say that this is not his job as authorized by Dodd-Frank. This argument will impress only lawmakers looking for any excuse to help the big banks.
- The “shadow banking sector” — hedge funds, for example — grew rapidly in large part because it was a popular way for very big banks to evade existing capital requirements before 2008, even though those standards were very low... It would be a disaster if this were to happen again.
- [Just because your friend says it's a good idea to jump off a bridge...] If China, India or any other country wants to produce electricity using a technology that severely damages local health, why would the United States want to do the same?
As I've repeatedly noted, the government's policies discourage lending to Main Street and the little guy.
And Comstock goes on to note:
Making all of this more interesting is an op-ed written by a regional bank CEO a couple of days ago. Right now, regional banks are subject to the same regulations as the big 6, but they are totally different beasts.
Bob Wilmers, M&T Bank CEO, writes that the Big 6 should be subject to stricter regulations like higher capital requirements because they trade so much, and it's risky, but smaller banks, like his, should not be subject to such high capital requirements because they actually use the free capital on their balance sheets to lend to entrepreneurs, etc.
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I can think of a better rebuttal of point No 1 than Simon Johnson produces.
ReplyDeleteHe claims that the liability side of banks’ balance sheet has “nothing to do” with the asset side. Strikes me that if banks are forced to hold more capital per dollar that they lend, that does raise the cost of lending as the banks rightly claim.
A better rebuttal is the point that borrowing from a bank is not the only way of funding a business or house purchase: equity is another way. I.e. if government clamps down on bank lending, that in itself slows economic growth as the banks rightly claim, but government can perfectly well make up that by channelling stimulus or “hard cash” in household pockets.
The beauty of equity finance is that there is practically zero chance of taxpayers having to come to the rescue when a business or set of businesses fail. So just to ensure we have a level playing field, the chance of a systemic bank collapse should be reduced to near zero. And that can be done via a stonking great increase in banks’ capital requirements.