Banks war of attrition against regulation is working (for them)

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The Haze notes with little surprise the ceaseless chafing and wriggling by the banks as they aim to overturn anything and everything designed to regulate their activities after the 2007/8 financial crash.

Their current target is proposed tougher restrictions that were to be imposed as part of increased Basel III capital requirements – as ever the banks will only sign up if they have a custom built loophole that allows them to dance right around it.

Some of this is a little technical but bear with us

One of the hard-fought battles of Basel III was establishing limits on total leverage, as well as risk-weighted leverage.

Basel II, which was implemented in Europe pre-crisis, called for risk-weighting of assets. You didn’t count every asset at its face or market value, add that up, and then use that to determine how much in equity a bank had to have as loss reserves; banks had to count only a percentage of the value of assets deemed to be less risky which of course is a subjective judgement that not many post 2008 are (or should be) terribly happy about banks making themselves.

The Basel II requirements are still way below what The Haze would regard as anywhere near systemically sustainable or ethically justifiable but even these limits look likely to fall victim to the great banking lobbying machine.

Bloomberg reports:

This week, the Basel Committee on Banking Supervision, an international group of regulators, announced a number of changes that will make the denominator in leverage ratios — total assets — less simple. Banks will be able to count as little as 10 percent of off-balance sheet commitments, such as letters of credit, as assets. Also, banks can net out cash they borrow and lend against securities in so-called repo agreements, as long as the deals are done with the same counterparty.

There’s a case of sorts for these relaxation… But there’s also a cost: Banks will have more opportunities to understate their assets.

What’s certain is that the changes represent an easing of requirements that were already too loose. The Basel rules require banks to have only $3 in capital for each $100 in assets by 2018 — meaning that a decline of just 3 percent in the value of a bank’s assets could render it insolvent…When capital is so thin, a little manipulation can mean the difference between stability and systemic crisis.

Experience and research strongly suggest that much higher leverage ratios — as high as $20 in capital per $100 in assets — would provide a net benefit by reducing the likelihood of economy-killing financial disasters. The dangers of an undercapitalized banking system have just been vividly demonstrated. Regulators recognized the problem, but they tightened capital-adequacy rules too little. They would do better to show more resolve.

It will seem extraordinary that banks, regulators and politicians have learnt so little from the global financial crash of 2008 and that even $3 in capital for each $100 in ‘assets’ (loans) is deemed too hard for banks to live with.

The fact that a conservative financial publication like Bloomberg are calling for a 20% capital ratio shows that more and more orthodox sources are awake to the dangers.  Don’t expect our captured political establishments in the U.S, and the U.K. to catch up any time soon.

But the good news for banks doesn’t stop there! They look to be on their way to scoring another important win on a different front: trading in physical commodities.

An exclusive report by Shahien Nasiripour of Huffington Post reveals:

Big banks are poised to reap a significant victory in their fight to maintain lucrative businesses hoarding, selling and trading physical commodities as the Federal Reserve prepares to punt on the issue, people familiar with the matter said.

The Fed’s move to solicit public input on what it should do, rather than use its authority to regulate the activities of large financial institutions, is expected to be announced by Wednesday afternoon in advance of a Senate Banking Committee hearing on the issue. Some federal financial regulators said the move may be a way for the Federal Reserve’s Board of Governors in Washington to evade calls to curb banks’ risk-taking.

Translation: the Fed has the power, now, to tell the banks to cut it out and exit or curtail their participation in the trading of physical commodities (note that former investment banks that are now under the Fed’s purview have physical commodities trading grandfathered for a few years; Goldman cheekily expanded its activities by acquiring a major aluminum warehousing operation that was the focus of the New York Times expose. the Fed blandly permitted it rather than calling out the violation of the intent of the waiver).

By having the Fed rely on the public comments process, it enables the banks to throw their firepower at it, both directly and through all sorts of proxies (friendly think tanks, fake public interest groups). It’s the same sort of concerted effort that enabled banks to score their Basel III win; why shouldn’t the same route be even more successful with a bank-friendy Fed?

The Huffington Post article notes:

It’s likely to stoke criticism that the central bank, while taking some action to reduce the risks large lenders pose to the financial system, is shirking its responsibility to ensure financial stability.

“This is clearly an attempt to avoid dealing with the issues while pushing back against public pressure,” said Joshua Rosner, managing director at independent research firm Graham Fisher & Co….

JPMorgan Chase, Goldman Sachs and Morgan Stanley now are among the nation’s biggest suppliers of energy, according to industry rankings and federal data. Over the last several years, the three banks were among a group of select financial institutions to broaden their physical commodities activities as the sector promised substantial revenues that, coupled with the banks’ traditionally low cost of financing, guaranteed steady and at times enormous profits.

Yet again banks operate purely for their own enrichment. Being able to use their weight to manipulate various commodities markets is a clear-cut transfer from the productive economy to the financialised casino economy. The complacency and collusion of the Federal Reserve is proof yet again of who Neoliberalism works for.

Sources include: http://www.nakedcapitalism.com/2014/01/banks-win-commodities-trading-success-watering-basel-iii-capital-rules.html