Whilst Federal Reserve may be confused as to when to
withdraw stimulus (i.e. QE), it seems that they do not have much confusion on
what to do with Basel III.
They have decided to adopt tougher requirements for bank
balance sheets under Basel III.
The rules are purportedly designed to prevent
another financial crisis - however, it may be a tall claim. Basel II when
launched during early 2000s, it was acclaimed as revolutionary. Well it ended
up creating wrong revolution as it made banks' credit / lending pro-cyclical
and gave unnecessary prominence to External Credit Rating agencies. So we have
to wait and see whether Basel III fulfils the claims its creators currently
make.
Well it looks like Basel Accords are predominantly
created mainly by economists. More bankers must be involved at the design stage
itself. Basel III rules are supposed to make it more expensive to be a
very big bank while going easier on small and medium-size institutions. They
don't realise Big Banks are smarter and can convince the regulators how strong
they are - For example, just before bankruptcy, Lehman was in full compliance
with Basel II regulations and complied with capital adequacy norms!!
The reckless lending led to subprime bubble and its
burst resulted in worst banking crisis since the Great Depression of
1929. The federal government launched an unprecedented bailout that
pumped about $700 billion into the U.S. financial system. The US Government is
still saddled with issues related to the 2008 Credit Crisis - QE related
problems, being one of them.
The time frame to comply with rules is rather relaxed -
the banks must meet a new minimum capital requirement within 5& half
years - it means the banks need to comply it by 2019 or even 2020, given
the possible extensions, we can expect from the regulators based on
the requests from banking sector.
One of the key rules is that the banks have to hold at
least 7% of RWA (risk weighted assets) in high-quality capital, such as common
stock and retained earnings. Well it is not the capital adequacy that prevents
bank collapses –the way the credit risks are analysed and managed is more
important.
Fed officials made a big statement that they will introduce
tougher rules on the nation's largest banks - well it seems to be a joke
because, when JPMorgan Chase & Co. didn't provide much detail about its USD
5 billion derivative loss a few months back, Fed let them go without any
significant action. When the law makers asked the CEO & Chairman of J P
Morgan - Jamie- a few questions, the
answers were not only as murky as the deal; instead Jamie smacked
arrogance in his replies (it shows the age old principle in action
"attack is the best defence'.) The
banks which accept deposits from public still play high risk games, especially
the large ones such as JP Morgan - this casts doubt whether new standards, part
of the so called Basel III will make any real difference.
Link to the book : http://eu.wiley.com/WileyCDA/WileyTitle/productCd-1118604911.html
http://www.amazon.com/Advanced-Analysis-Management-Finance-ebook/dp/B00CJ9FVGS
Link to the book : http://eu.wiley.com/WileyCDA/WileyTitle/productCd-1118604911.html
http://www.amazon.com/Advanced-Analysis-Management-Finance-ebook/dp/B00CJ9FVGS
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