Showing posts with label banking regulation. Show all posts
Showing posts with label banking regulation. Show all posts

Thursday, January 14, 2016


After the Great Depression was kicked off by the 1929 stock market crash Congress passed some laws intended to prevent a recurrance, ever again.  One of the contributing factors to the 1929 crash was big banks playing the stock market, with depositors money.   And in the 1930's Congress passed a law preventing banks for buying and selling stocks.  This was the Glass-Steagall act and it remained the law of the land for 60 years. Banks hated Glass-Steagall 'cause there is a lot of easy money to be made in the stock market, particularly if you have a lot of money to invest. It took the banks 60 years of solid lobbying and "campaign contributions" to finally repeal Glass-Steagall some time during the Clinton administration. 
   And now after Great Depression 2.0, kicked off by banks making dumb ass mortgages, people are calling for some regulation to curb big and brain dead banks from crashing the economy.  Bernie Sanders is calling for reinstatement of Glass-Steagall.   Actually this is a fairly good idea.  Banks primary purpose is to finance construction and house sales, and finance business activity.  Buying and selling stocks just soaks up bank assets and does not contribute to economic growth. 
   The other thing banking needs is some incentives to write decent mortgages.  The "Ninja" mortgages (No income, No job or assets)  caused the crash of 2007.  A mortgage must not exceed the real market value of the property, in fact the buyer ought to put up 10% or so of his own money to buy the place.  And the bank needs to see that the borrower is gainfully employed and is making enough to make his monthly mortgage payments.
   One way to make this happen is to require that the bank that issues the mortgage must hold that mortgage to maturity.  If the bank knows that it will b holding the bad should the borrower default, they will be fairly careful not to write mortgages for untrustworthy borrowers. 

Monday, January 20, 2014

Basel backs off

"Basel" is a international committee of bank regulators who meet in Basel Switzerland now and then.  Their mission is to regularize and harmonize banking regulations world wide, with the idea of prohibiting risky lending and speculation of the sort that caused Great Depression 2.0, and preventing countries from taking over international banking thru favorable national regulations.  Sort of spread the pain of regulations evenly round the world.
   Basel had wanted to enforce a rule requiring banks to have capital (money from investors) equal to 3% of the outstanding loans ("assets" in banker speak).  The idea being that  capital can be used to cover losses from loans gone bad (lender stops paying on the loan). 
   The banks screamed and writhed and threatened to hold their breath.  And Basel backed down.  They changed the rules in complex ways, some kinds of loans don't count, and some derivative deals can be counted as capital, and lo and behold, just about all the banks can meet the 3% standard without raising new capital.  Great joy in Euro Bankville. 
   The Economist article goes on to criticize the concept of a leverage ratio (capital to loans) as crude and inefficient.  They prefer a weighted scale where very safe loans ( US T-bills for example) need less capital than say Greek bonds.  Which sounds good, but who does the weighting?  Reputable US rating agencies like Standard and Poor gave AAA ratings to mortgage backed securities that became worthless.  
    The Economist likes a more liberal leverage policy.  There are two ways to meet a 3% capital to loans ratio.  Raise more capital (difficult and expensive) or make fewer loans.  The Economist doesn't like option #2, they think it inhibits economic growth. 
   In real life, at least on this side of the pond, the issue is not all that important.  If a big bank gets in trouble, the feds bail it out.  We have FDIC, Federal Reserve, and the US Treasury all of whom handed out truck loads of money back in 2007.  Bankers like this.  In the bad old days, when a bank failed, the depositors lost their savings, and the bankers had to skip town before the lynch mob got its hands on them.