Regulators set to vote on rule to increase bank leverages

Regulators are due to vote today on whether to increase the "leverage ratio" for the eight largest U.S. banks to 5-6% of their total assets. The Basel III standard is 3%.

The move would force banks to add tens of billions of dollars in loss-absorbing capital, although many firms have already been bulking up in anticipation of the rule change.

Meanwhile, the Fed has given banks two extra years - until July 2017 - to ensure that their collateralized loan obligations (CLO) comply with the Volcker rule's restrictions on speculative investments. The extension is a reaction banks' fears that selling their CLOs would lead to substantial losses.

Relevant tickers: JPM, C, BAC, WFC, GS, MS, BK, STT, ZION


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  • Lance Brofman
    , contributor
    Comments (1337) | Send Message
    "..To determine if someone is an adherent of the regulatory fallacy ask this question: Do you believe that given the degree that the tax burden was shifted from the rich to the middle class, was there any type of regulatory policy which would have prevented the financial crisis and subsequent depression? If they answer yes, they are adherents to the regulatory fallacy.


    In Paul Krugman's 2012 book "End this Depression Now!" he comes heartbreakingly close to connecting the dots between the reduction in the progressivity of the tax system and the cycle of overinvestment that caused the depression. He states that the book is much less concerned with the cause of the depression than what should be done to end it. His prescription is fiscal stimulus focused on the spending side that has even less of a chance of being enacted than the tax cuts suggested above.


    Those on the right have their own version of the regulatory fallacy. They blame the government sponsored enterprises Federal National Mortgage Association Fannie Mae (OTCQB:FNMA) and Federal Home Loan Mortgage Corp. (OTCQB:FMCC) and the Community Reinvestment Act. According to their theory, regulation such as the Community Reinvestment Act resulted in a vast increase in subprime mortgage lending that caused the financial crisis. Possibly the non-bank private entities that originated and securitized most of the subprime loans mistakenly thought the Community Reinvestment Act applied to them.


    As with the regulatory fallacy, both left and right versions, there is a miniscule grain of truth to it. Financial innovations such as credit default swaps and regulatory changes like repeal of the Glass-Steagall Act slightly affected the exact timing of the onset of the depression. However, once the tax burden was shifted from the rich to the middle class it was just a matter of time before middle-class consumers became unable to absorb the increased production and service the debt that accompanied the overinvestment. Different regulatory policies might have shifted the bubble more towards commercial real estate rather than residential real estate or vice-versa but the outcome would have been similar.
    Blaming regulatory policies and financial innovation for the depression is like blaming the armaments manufacturers and soldiers for World War II. In order for the war to occur there had to some weapons made and some soldiers to fight. If those particular armaments manufacturers and soldiers were not available, others would have taken their place..”
    8 Apr 2014, 06:34 PM Reply Like
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