Counterparties: QEBasel

January 7, 2013

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The central bankers in the Basel committee have suddenly decided to make Basel III a lot less restrictive and a lot less urgent.

The Basel III rules, intended to make the world’s big banks safer during crisis, were scheduled to take effect on January 1, 2015, but banks will now have an additional four years to fully meet Basel’s “Liquidity Coverage Ratio” [LCR]. Now, they will only have to to be 60% of the way there by 2015. Mervyn King, the outgoing head of the Bank of England, says that the “vast majority” of the 200 banks under Basel’s auspices are already in compliance with these less restrictive standards. (Felix has a comprehensive set of posts on multi-year battle over Basel here.)

Crucially, the new Basel broadens the list of what banks can hold as “high-quality liquid assets” as a buffer against the next crisis. Banks can now count certain high-rated corporate bonds, equities, and mortgage-backed securities toward their LCR.

The NYT’s Jack Ewing says this marks “the first time regulators have publicly backed away from the strict rules imposed by the Basel Committee in 2010.” Reuters, for its part, called the previous Basel liquidity standards “draconian”. One bank analyst said the new rules amounted to “a fairly massive softening”. Per Kurowski says the rules will help banks, but will help kill the real economy.

The new rules, Simon Nixon writes, will free up money for banks to use productively, and will mean they’ll need to hold fewer soveriegn bonds. This could mean bigger profits: Barclays may see its pre-tax profit rise by 4%. Mervyn King, the outgoing head of the Bank of England, told reporters: “Nobody set out to make [Basel] stronger or weaker, but to make it more realistic.”

Realistic or not, the central bankers on the Basel committee have shifted their focus. When Basel III arrived in 2010, it was a “quiet victory” — central bankers succeeded in passing tough new rules to make big banks safer. Now, those central bankers are no longer primarily worried about preventing banks from taking down the financial system. They’re back to their monetary policy role: As FT Alphaville suggested, they’re worrying about banks lending.  – Ryan McCarthy

On to today’s links:

BofA to pay more than $10 billion to Fannie Mae, unloads mortgage servicing rights – DealBook
10 banks pay $8.5 billion to end foreclosure reviews – Reuters

New Normal
America’s prison population is shrinking — you can thank California – Wonkblog
Median pay for less experienced MBA grads: just $54,000 – WSJ

Unsolved Mysteries
No one really knows how much government debt is too much – The Economist

Why the NYSE merger may hurt average investors – Stephen Gandel
There are 181,000 social media “gurus”, “ninjas” and “mavens” on Twitter – AdAge

The year in corporate bullshit, “guff, cliche, euphemism and verbal stupidity – Lucy Kellaway

Get ready to mint that coin – Paul Krugman
Rebranding the trillion-dollar coin – Steve Randy Waldman
The trillion-dollar coin is all fun and games until someone puts an eye out – Felix

Old Timey
Tom Wolfe is confused by Wall Street’s eunuchs – Newsbeast

Interesting Failures
Why infinite scroll failed at Etsy – Dan Nguyen

Crisis Retro
“Thank you, America” – AIG CEO Robert Benmosche

“Profoundly unhappy” adolescents earn 30% less as adults – WSJ

Crisis Retro
“Thank you, America” – AIG CEO Robert Benmosche

“Profoundly unhappy” adolescents earn 30% less as adults – WSJ

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1. The LCR will be introduced as planned on 1 January 2015, but the minimum requirement will begin at 60%, rising in equal annual steps of 10 percentage points to reach 100% on 1 January 2019. This graduated approach is designed to ensure that the LCR can be introduced without disruption to the orderly strengthening of banking systems or the ongoing financing of economic activity.

2. During periods of stress it would be entirely appropriate for banks to use their stock of high quality liquid assets (HQLA), thereby falling below the minimum.

3. Banks will be able to count a much wider variety of liquid assets towards their buffers, including some equities and high-quality mortgage-backed securities.

4. European and American banking stocks surged because they will incur much reduced costs due to the implementation of the relaxed rules.

5. Banks in many other counties will have no benefit, as supervisors have already asked for strict liquidity rules, and they are not willing to take it back.

6. On the negative side, the main objective of Basel iii is to restore investor confidence. The Basel Committee has developed the new framework as a response to the crisis, and has explained (time and time again, every month since November 2010) the need for these strict rules.

Although it is true that Basel iii is an overreaction to the market crisis, it is way too late now to “ease” the rules and make investors happy the same time. This is simply a red flag for investors, leading to the conclusion that banks could not really comply.

I agree with the Liquidity Coverage Ratio (LCR) Basel iii amendment, but I cannot agree with the way it was presented.

George Lekatis
Basel iii Compliance Professionals Association (BiiiCPA)

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