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The Basel Committee will require global banks to hold Tier 1 capital of 9%, according to a draft...
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Tuesday, September 7, 2010, 8:12 AM ETThe Basel Committee will require global banks to hold Tier 1 capital of 9%, according to a draft proposal, and will be able to demand banks boost that figure to 12% in boom times. At present, banks are required to have a Tier 1 ratio of no less than 4%.
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problems with it.....mergers to come....
The ability to raise requirements in boom times is important. Bernanke for several years has been noting that the current regulatory regime is procyclical in that it results in higher capital requirements during bad times, exacerbating cyclical fluctuations.
In order to go countercyclical, it is necessary to start raising capital requirements in boom times, as a way of damping down lending and to gain room for leniency when times get bad.
There are times when relatively safe corporate bonds, Single-A rated companies that are in no immediate or long term risk of default see their bonds trade down to well below levels that would be considered distressed.
So would you call insolvent a bank that held nothing but solid investment grade corporate debt, debt that was solidly over-secured by real tangible assets that in a worst case, world is ending scenario could be sold and satisfy the debt 2 times over?
Because that is what universal mark-to-market would do to a lot of banks.
The problem, which most fail to correctly identify, is that banks, investment banks, and asset management firms are three distinctly different entities and should have different capital requirements, different business models, and entirely different portfolios of long term holdings.
The present problem is that all three operate as quasi-hedge funds. Fix that, and you'll fix the problem.
Capital requirements is one sure fire way to do it. Better disclosure is another (as in line item disclosure of holdings) and let investors judge the soundness of the balance sheet with real information. Separating banking from investment banking is another. Retail banks shouldn't be in the business of investment banking, period. And lastly, don't allow investment banks to operate as public companies (just as law firms, etc can't operate as public companies). Force them to operate as partnerships, sole proprietorships, whatever. That simple change alone will curtail their ability to raise capital, take on leverage, risk, etc.
Let hedge funds take risk, let investment banks advise companies and issue/trade securities, let commercial banks take deposits and make safe loans (and require them to hold onto a signficant risk position if they decide to sell the asset or securitize it with the assistance of an investment bank), and let asset management companies manage long-only mutual funds/pension funds/etc.
Our problem throughout this crisis has been an almost laughable focus on the wrong topic at the wrong time. Good to see that continues to this day.
During the height of the mortgage crisis, we tried everything but that which would have quickly worked. During the banking crisis we tried to curtail paychecks, and we succeeded magnificently in curtailing the paychecks of the middle earners in those banks. We've also tried to fix the problem of prop trading in banks, a problem that shouldn't exist in any form or fashion. The list goes on and on.
It truly is laughable. And thankfully, it's typically exploitable in the capital markets.