Counterparties: The bank capital battle

By Ben Walsh
June 7, 2012

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America’s big banks are short a mere $500 billion in capital. That’s how much more of a cushion Nobel prize-winning economist Robert Engle thinks is needed for banks to survive another financial crisis. Even more disconcerting is that the shortfall is just $39 billion less than it was before the collapse of Lehman Brothers.

If that isn’t bad enough, Engle’s calculations actually rate European banks as more capital-deficient than their American counterparts – thanks to differing accounting treatment of derivatives. (Morgan Stanley is currently trying to decide what to do with $50 trillion of those.)

In the wake of JPMorgan’s multibillion-dollar botched hedge, there’s something of a bipartisan consensus for stronger bank capital requirements for America’s banks. Even Richard Shelby now thinks the Basel III requirements should be beefed up. Keep in mind that just last fall, Jamie Dimon was calling capital requirements “anti-American“.

It’s a battle Dimon and the banking industry appear to be losing. The Fed has released details of new capital requirements and in doing so has shown it rejected a number of bank requests for favorable accounting treatment. More importantly, of course, the new regulations will require banks to hold more equity. The FT reports that the Fed is also proposing new rules that will require mark-to-market accounting of banks’ securities portfolio. That, too, is likely to force them to raise more capital.

For the total bank nerds, here’s the link to the Fed’s new capital requirements proposal. Enjoy. – Ben Walsh

On to today’s links:

Must Read
The increasingly lucrative business of incarcerating immigrants in private prisons – HuffPost

Long Reads
How two brothers became America’s largest distributors of illegal pain meds – Businessweek

Facebook
Even investors who bought pre-IPO Facebook shares last year are now facing big losses – WSJ

New Normal
Sorry, but Americans don’t actually care about organized labor anymore – TNR
Can unions become relevant again? – Felix

The Fed
Yellen makes the strong case for doing something – Federal Reserve
Lockhart cites “halting and tenuous” recovery, hints at more Fed action – Federal Reserve Bank of Atlanta

Primary Sources
Ben Bernanke pretty much saying the same thing he said in April – Federal Reserve

EU Mess
Spain has a trump card for its inevitable bailout: It’s too big to fail – NYT
Merkel backs a two-tiered EU, with the UK at the margins – Bloomberg
Urban myths: Greek and Spanish depositors moving cash to Germany – Alea

Good Thinking
Remove the motivational quote and JPEG from your email signature immediately – Deadspin

Growth Industries
Twitter already makes more money from mobile ads than desktop ads – All Things D

Ouch
The new Fannie Mae CEO wasted no time in opposing principal reductions – WSJ

2 comments

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US banks are reducing capital via dividend increases and share buybacks while profits shrink. They are also under reserving, which means that their capital cushions are even smaller than they look. http://j.mp/IZEa9G

Posted by LeeAdler | Report as abusive

Strange stuff about Fannie’s new CEO – this guy has conflicts of interest up to the eyebrows with his old employer/client, BofA, about put-backs of improperly originated mortgages – he has to know every sin at BofA that FM needs to prove to enforce the repos it wants from that former client of his. Not kosher.

Princial reductuions – this again? *yawns*

Posted by MrRFox | Report as abusive