Basel III: TBTF banks drag us back to the brink

(HT: Vern).  I don't pretend to get this 100%. But here's the upshot: the evil TBTF banks have successfully lobbied for lower liquidity (i.e. cash) requirements from the international "Basel III" Committee on Banking Supervision. Specifically, the banksters have been fighting to include riskier (read: shittier) securities in the numerator of the so-called Liquidity Coverage Ratio that banking regulators use to assess the riskiness of a bank.

Why is liquidity important, and why are the mega-banks lobbying to lower the liquidity requirements? Because the 2007-08 financial crisis started with the collapse of AIG, which in turn caused a run on banks when they couldn't honor their deposits and pay their creditors (because AIG was supposed to "insure" the banks' riskier investments that were a toxic house of cards). In other words, everybody everywhere had a shortage of cash simultaneously, leading us to near-collapse of the global financial system... until the U.S. Treasury, Federal Reserve and other central banks stepped in with huge amounts of free cash for the banks, which continues to this day.

So... now older and wiser, our banking regulators were supposed to pass Basel III reforms to prevent this from happening again... but the banksters and their lobbyists are patient and persistent, and have continued pushing to restore risk, since the only way they can make huge profits for themselves at our expense is through huge amounts of leverage (i.e. using borrowed money to buy assets and securities).  

I know it's tempting to let your eyes glaze over and ignore this stuff, or just buy into the myth that "irresponsible borrowers" and the FMs caused the Great Recession, but you really need to pay attention and tell your Congressmen that you care about banking supervision.  The mere fact that they (the banksters) care about this and spend $ billions to prove it, while you and I are silent, puts them at a huge advantage. 

You Call That Liquid? New Basel III Liquidity Rules Ineffectual

By Mayra Rodriguez Valladares

January 7, 2013 | American Banker

URL: http://www.americanbanker.com/bankthink/you-call-that-liquid-new-basel-iii-liquidity-rules-ineffectual-1055635-1.html

Johnson: Raise equity requirements for TBTF banks

Johnson's argument is a bit technical for us non-bankers, but the gist is this: regulators should force banks to hold more "tangible" equity -- meaning real money from investors -- as a share of their tangible assets.  A bank's tangible assets include customers' deposits (which are liabilities the bank must pay back).  

The truth is that nobody has come up with a good way to assess a bank's riskiness when they are so highly leveraged, no matter how much the banks may assure us they know how.  Right now, the banks basically regulate themselves, telling the regulators how risky they are.  This can't continue. 

Big banks resist a higher Tangible Common Equity (TCE) ratio because: 1) they can make a lot more profit using high leverage (over-borrowing) than they can raising equity from investors; and 2) if they make bad bets with borrowed money then we taxpayers will bail them out anyway.

If you're interested in this somewhat abstruse but absolutely crucial issue, you can learn more here.

A Very Strange Way to Assess the Safety of Banks

By Simon Johnson

October 1, 2012 | Bloomberg

URL: http://www.bloomberg.com/news/2012-09-30/a-very-strange-way-to-assess-the-safety-of-banks.html