The great banking swindle of 2013

By David Weidner: How can something designed to make the financial system safer actually make it more dangerous?

Well, that’s what happened this week when the global financial industry won surprisingly huge concessions from regulators. 

On Monday, the world banking regulators unveiled a series of revisions to their new liquidity requirements. Read Global regulators water down bank liquidity rules.

In essence the requirements are the minimum amount of cash banks keep aside should they suffer massive loan losses, or customers begin pulling their money and business. See summary of the Basel III revision (pdf).

Bankers don’t like higher capital requirements because they squeeze profits. Tighter liquidity ratios limit the amount of lending (or risk) banks can take, therefore reining in gains. Bankers argue that cushions only matter in panics, and panics are rare.

But that’s exactly what happened a few years ago. 

During the financial crisis of 2008, we learned that the world’s biggest banks were not prepared to head off even a slow rush to the exits. Without enough assets to refund their customers money, they needed taxpayer bailouts. Everyone, including the CEOs of the biggest banks, agreed that bigger cushions were needed.

So, the world’s banking regulators set down new capital rules. The rules came out in 2010. The Bank for International Settlements ultimately asked banks for more, and higher quality, assets — either cash or highly rated and liquid securities (Treasuries etc).

There are a lot of moving parts to the new rules, but basically, BIS wanted banks to meet the new requirements in two stages. By 2015, they were supposed to have a 4.5% common equity ratio and 6% tier 1 capital ratio. By 2019, the numbers would rise to 7% and 8.5% respectively.

Think of it this way. When banks make a $100 loan today, they’re supposed to have roughly $5 in the vault to back it up. Regulators wanted that number to be closer to $8.50.

Of course, the banks howled. When the rules were introduced, the head of Citigroup Inc. C -0.02%  said the rules would raise “the cost of credit precisely when credit is needed the most.” Read text of Vikram Pandit’s speech at 2010 Buttonwood Conference .

Jamie Dimon, the head of J.P. Morgan Chase & Co. JPM +0.20% , which took a $10 billion bailout, issued debt with government guarantees and acquired two rivals in deals subsidized or arranged by regulators, said the new rules would be time consuming for bankers. Dimon added that the rules would “exacerbate” a credit crisis. He called some of the rules “un-American.” Read report on Dimon’s remarks .

Reuters

New bank regulations may set the stage for more bailouts.

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