"History is a wonderful thing, if only it was true"

Saturday, September 11, 2010


Global economic policy: Monetary illusions | The Economist

With most governments unable, or unwilling, to offer more fiscal stimulus, central banks are left solely responsible for propping up the flagging recovery.
Responsibility for boosting growth must be more evenly split with politicians. Only politicians can address the structural problems that are also holding back the rich world’s economies, such as the housing debt in America and the barriers to hiring in parts of Europe. Only politicians in countries, notably including America, that still have room for fiscal stimulus can ensure that it is used to complement monetary policy. And only politicians can couple stimulus with longer-term pension and tax reform, so that investors do not lose faith in sovereigns’ future solvency. Such a combination (however difficult given the electoral cycle in America) would avoid damaging the economy with ill-timed austerity now, and increase the effectiveness of bigger central-bank purchases of government bonds.

The article

Comparison to WWII

But - then we have Basel

Tough New Banking Rules Coming

Global Group Prepares to Limit Risk-Taking; Cost of Loans

Convening in the Swiss city of Basel, the officials are hoping to cinch a deal this weekend. In one of the most far-reaching steps, the current proposal would require global banks to maintain basic levels of capital equal to at least 7% of their assets—much more than existing standards of roughly 4% for large U.S. banks.

The effort would transform banking, potentially forcing banks to take fewer risks, make less profit and face more government scrutiny. It comes nearly two years after the chaotic bankruptcy of Lehman Brothers convulsed the global economy and led to taxpayer-funded bailouts world-wide. U.S., European and Asian officials hope an accord will create new global standards designed to firm up the foundations of large international banks.

For consumers, the rules could cut both ways—potentially driving up the rates they receive on deposits but also raising the cost of loans and crimping their availability. "Everybody is going to feel the impact a little bit differently, but everyone is definitely going to feel the impact," said Mary Frances Monroe, vice president of regulatory policy at the American Bankers Association trade group.For banks, the rules could require them to raise capital, shrink balance sheets and dump business lines deemed too risky. They'll likely have to keep in reserve more earnings to protect against potential losses, which will leave them less money to pay investors and employees.

Regulators and central bankers who comprise the Basel Committee on Banking Supervision, the group in charge of international banking rules, have been negotiating for months. They have largely agreed on the broad parameters and hope to have a final deal Sunday. But the timetable could slip into next week amid a debate about how long banks should be given to implement the rules.

The impact won't be spread evenly across global banking. In some countries, such as the U.S., Canada and the U.K., banks have raised significant amounts of new capital—funds that reduce their debt level, and therefore pare back risk—and are sitting on thicker cushions than counterparts elsewhere.

Some big European banks might have to augment their capital. Analysts at Morgan Stanley Thursday pointed to Germany's Deutsche Bank AG, Allied Irish Banks PLC, Bank of Ireland PLC and Austria's Erste Group Bank AG as potentially finding themselves short of capital under the new Basel rules.e.

Top Citigroup Inc. executives told Wall Street investors this week the new rules could prevent the firm paying dividends to investors until at least the end of 2011, and "exhibited a great deal of uncertainty around the impact" of the new rules, according to a report by Sanford C. Bernstein & Co. analyst John McDonald.

Bank of America Corp. and PNC Financial Services Group Inc. could be forced to sell their ownership stake in giant asset-management firm BlackRock Inc. Deutsche Bank AG is working on plans to raise more than $10 billion in capital, in part to meet the new requirements, and one analyst predicted Basel 3 could force Morgan Stanley to raise $1.5 billion in capital.


Many other banks could take similar steps to meet government mandates. On Friday, Allied Irish Banks PLC sold its Polish operations to Banco Santander SA in a 2.94-billion-euro deal that was mandated by European regulators because the Irish lender had received state aid.

Bank of America, PNC, Citigroup, Morgan Stanley, Deutsche Bank and Allied Irish Banks declined to comment.

Michael Mauritz, an Erste spokesman, said "we feel pretty comfortable" with the bank's capital ratios, but he added that "nobody really knows what Basel will bring." Bank of Ireland spokesman Dan Loughrey said his company currently exceeds the capital requirements set by Irish regulators.

Authorities are racing to complete the new rules by a November meeting of world leaders in Korea, where the standards could be formally ratified. The Basel committee, long the international standard-setter, was charged last year by the Group of 20 leading nations with overhauling the rules.

Officials are likely to begin implementing the protocol in 2013 through a process that could last at least five years. Each country will have to tailor the plans to its own banks.

In other words, banks would have to hold in reserve $7 in capital for every $100 in investments and loans. The riskier the loans and investments, the more capital would be required.The plan under discussion would require banks to hold a type of capital known as common equity that equals at least 7% of a bank's risk-weighted assets, which includes a 2.5% buffer. Under the new Basel rules, banks would be able to dip below the 7% threshold and into their buffer, but would likely face limits on dividends and executive compensation. If a bank's common-equity ratio fell below 4.5%, they could face tight regulatory sanctions and potentially seizure by national regulators.

Banks also wouldn't be able to move risky investments or trading off their balance sheets to shield assets from capital requirements. Analysts believe this could force banks to curb their appetite for high-risk, high-profit activities such as trading and derivatives that led to soaring profits before the crisis. The international rules would be on top of financial regulations passed in July by Congress.

Higher capital requirements "could be quite significant for a number of banks," said Bernard de Longevialle, a Paris-based managing director at ratings company Standard & Poor's. John Raymond, a London-based banking analyst at CreditSights, noted, however, that bank executives likely will need more details before they'll be able to gauge the precise impact.

On the other side of the spectrum, banks whose capital cushions exceed the new requirements are likely to face pressure from analysts and investors to start repurchasing shares or raising dividend payments. Those practices were largely abandoned amid the crisis as banks tried to conserve capital.

The industry has warned that tougher capital requirements will force it to curtail lending as banks keep more money in reserve, a move that could take a toll on stuttering economies in the developed world.

The Basel Committee, citing its own research and academic studies, counters that there's little evidence to support the industry's assertions. Regulators say the changes will create a more stable banking system, less susceptible to crises.

The success of any accord is largely dependent on the level of trust among countries as they adopt the rules. If any one country refuses to implement the rules, other countries could try to penalize that country's banks with higher capital requirements or even more severe sanctions.

French officials remain skeptical that U.S. regulators will move swiftly to implement the new rules. "We won't apply the new Basel 3 rules if the Americans don't do the same," French finance minister Christine Lagarde said Wednesday in an interview with France's La Tribune newspaper.

U.S. regulators have said they will implement the rules quickly.

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