Since Great Depression 2.0 kicked off in '08 there has been a lot of talk about doing something about the banks. Looks like the international banking community is finally taking some action.
The subject is reserves, how much money must a bank hold in its vault to pay out withdrawals and cover losses. If a million dollar bank loan goes bad (borrower stops making payments) the bank ought to have a million dollars in reserves so it can stay in business, pay out withdrawals and even have a little money to do new loans with.
Notice that the Basil people cannot bring them selves to just post a level of reserves. That's too easy and people might understand what's going down. Instead they announce a complex mix of reserve levels which add up to 7% or maybe 10% depending upon the phase of the moon.
The issue is that banks hate holding money in the vault. They want to loan it all out to make more money. US banks have been holding about 4% reserves which is almost enough. All the real banks (except Citi) rode out the financial storms. The failures were all "near banks", brokerage houses (Lehman, Bear Stearns, Merrill Lynch), insurance companies (AIG) and mortgage makers (Countrywide), or little banks that FDIC could pay off.
The other issue is the quality of reserves. Ideally banks would hold real cash, bundles of dollar bills, neatly wrapped, in their vault. The Basil paper seems to give some leeway here. For instance, US banks can deposit their reserves with the Federal Reserve Bank and draw a bit of interest. They can buy T-bills 'cause they are as good as cash. Things get flakey from there. European banks used hold mortgage backed securities as reserves. This killed a flock of European banks when the mortgage backed securities suddenly became worthless in 07.
The Basil document is important, 'cause banking is a mobile business. Money is light and easy to ship. Banks can easily set up to do business in the country with the most lenient banking laws. Pass a Sarbanes Oxley bill and watch all the merger and acquisition business move out of New York and over to London. So we need a world wide agreement to actually do anything effective. As opposed to national regulation that merely drives banking business of of the country.
3 comments:
Just a small note -- many more real banks than Citi have failed as a result of the financial crisis. Washington Mutual was the largest ($310B in assets). Two other more regional (but still top-100) banks that I can think of right off are IndyMac ($32B) and AmTrust (can't remember). We are on track for about 200 more failures this year -- many are small, but many are regional banks failing because of foreclosures in CRE. For instance, Carolina First just failed here in the south and was a good-sized regional bank.
Hope you're doing well -- I enjoy checking out your blog from time to time.
Sorry, I did forget about WaMu. They did go down with a splash. My point was, the big Wall St firms that called themselves banks mostly survived. The brokerage houses, Merrill Lynch, Lehman, Bear Stearns and the rest of them are gone, or coverted themselves into real banks.
Sorry, I did forget about WaMu. They did go down with a splash. My point was, the big Wall St firms that called themselves banks mostly survived. The brokerage houses, Merrill Lynch, Lehman, Bear Stearns and the rest of them are gone, or coverted themselves into real banks.
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