Counterparties: The bank capital battle
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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:
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