Banks, regulators should stop publicly bickering

June 13, 2011

By Antony Currie and Rob Cox
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

It may be time for U.S. bankers and regulators to lock themselves in a room and negotiate capital standards. Over the past week, they’ve done this publicly. That’s created unnecessary uncertainty and slammed stock and bond market investors alike. Debate is important. But the way they’ve gone about it seems counterproductive.

Federal Reserve governor Daniel Tarullo kicked the kerfuffle off in a June 3 speech. He hinted that systemically important financial institutions may have to hold as much as twice the Tier 1 common equity buffer that will be required under international standards known as Basel III. That came as a shock. If big banks had to hold that much capital, Bank of America, Citigroup, JPMorgan and Wells Fargo would need $500 billion more capital by 2019.

That didn’t just worry shareholders, who last week wiped out as much as $35 billion from the value of the 10 largest U.S. retail and investment banks. Bondholders also took fright. Five-year credit default swap prices implied funding costs for large banks had risen as much as 12 percent in the week following Tarullo’s speech.

Forcing banks to carry some extra capital should give creditors more protection. But the upper limit implied by Tarullo would render some businesses unprofitable. To bondholders, that signaled banks might have fewer profits from which to pay interest.

By Tuesday, the furor should have died down as the Fed implied that the so-called “SiFi buffer” might only be a smidgeon higher than the Basel III requirements. But that was quickly overshadowed by JPMorgan Chief Executive Jamie Dimon pointedly, and publicly, needling Fed chairman Ben Bernanke about regulation.

Dimon’s remarks were a stark reminder that banks will fight tooth and nail against any rules that crimp profits. Equally troubling was Bernanke’s admission that regulators hadn’t done cost-benefits analyses on new rules imposed on the industry.

For the economy’s sake, both sides need to find a balance that makes the banking system safer, generates sufficient returns for investors and offers incentives for banks to lend money. By the look of it, public bickering may not be the best way to achieve that equilibrium.

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Banks need to live by the rules and protect depositors, shareholders, and themselves. A lot of the high flyers have crashed and that ought to make the others want to fly safer, but greed and bonuses are just to hard to quit. I think that the banks need a 12 step program to live by so they can get over their greed addiction.

Posted by fred5407 | Report as abusive