Commentaries

from Rolfe Winkler:

Bank capital buffers increase, still not high enough

(To enlarge the chart above in a new window, click here.)

The superstructure of financial reform may be stalled in Congress, but at least regulators are forcing banks to raise capital. Since the nadir of the financial crisis in the fourth quarter of 2008, the Big Four have more than doubled their common equity, raising another $55 billion just in the fourth quarter.

The question is whether they've raised enough. With capital only a bit above early '08 levels, especially among regional banks, the answer is most likely no.

Stepping back for a minute, it's helpful to remember why capital is so crucial. The most important reason is that it provides a buffer to absorb losses from the asset side of the balance sheet. As assets are written down, a too-thin equity capital cushion leads to a run among creditors who race to get out before taking a loss.  Bank runs -- whether the run-of-the-mill type among depositors or the high finance equivalent among short-term creditors -- can quickly bring a financial system to its knees.

Luckily, regulators appear to be laser-focused on capital. Documents published in December by the Basel Committee -- an international collection of bank regulators -- would redefine capital in a number of productive ways.

More stringent capital requirements are also a back door way to accomplish other regulatory goals. For instance, the "size" component of the recently proposed "Volcker Rules" is designed to limit reliance on non-deposit liabilities. The more capital banks are required to hold, the smaller these liabilities.

from Rolfe Winkler:

Lunchtime Links 12-18

(Reader note: still working on

MUST READ -- Strict framework leaves room for maneuver (Masters/Jenkins, FT) While this subject may seem a little dry, it's the Basel Committee in Switzerland that will lead the way when it comes to how banks measure capital and how much they need to have. I'll offer more detailed thoughts on this later today.

Saab to be shuttered (Reuters wire) More creative destruction in the auto industry. In the end, the best Saab could do was sell the intellectual property for the 9-5 and 9-3 sedans...

China central banker says harder to buy Treasuries (Xin/Subler, Reuters) How ironic. The current account deficit is shrinking as the import/export imbalance with China is shrinking. So we're not stuffing as many dollars down China's throat which it is forced to recycle into Treasuries. Watch out for calls to buy Chinese so that the Treasury can finance its deficits! ;)

China asset bubbles will burst on inflation (Chen, Bloomberg)

Greenspan backs deficit reduction commission (Ferraro/Sullivan, Reuters)

Harvard swaps are so toxic, even Summers won't explain (McDonald/Lauerman/Wee, Bloomberg)