Monday, January 13, 2014

Fraud of the System: Basel Bestows a Break to the Banks, Belying Bankruptcy

Goes along well with the post The Twisted Tale of $200 Billion.... Now you see it.... now you.... opps!.

Source - Removing the Shackles

Very interesting folks!!!  My highlights and comments in blue.

Banks Get a Break on Leverage-Ratio Rules


Updated Jan. 12, 2014 4:31 p.m. ET

World banking regulators said they would soften the terms of a rule meant to ensure banks' soundness, bowing to pressure from banks that had argued it would stifle their lending to consumers and businesses.
The Basel Committee for Banking Supervision, made up of banking regulators from around the world, said it had revised the definition of its leverage ratio in ways that will allow banks to report lower levels of overall risk. The leverage ratio measures capital held by a bank against its total assets, so the changes will lead to higher reported capital ratios. That will reduce the pressure on banks to either shed assets or raise more capital to meet the requirement. This is called "Help!  Help!  We have no assets or capital left!!! But if we let the people know that we'll be cooked!!!"  The bank equivalent of "Please sir, can I have some more?"

The biggest beneficiaries of the changes appear likely to be banks most involved in securities and derivatives markets(ie: All the big guys that are "too big to fail") Most important, the rules no longer require banks to count 100% of their off-balance-sheet assets. That not only includes most of banks' derivatives exposures, but also the guarantees and letters of credit that are essential to greasing the wheels of international trade.

Which gives the banks greater ability to hide their derivative runs in the City of London etc...
In addition, the changes allow for extensive "netting" of securities-financing transactions, such as repurchase agreements, or "repos,"for greater counting of margin payments received from counterparties.  And they let banks eliminate double-counting of exposures involving central counterparties. Those changes will have the effect of reducing assets reported under the leverage ratio, increasing banks' reported ratios.

Please re-read my article  "Twisted tale of $200 billion"  
"when the Fed announced that an unprecedented $198 billion (that's 20% of a trillion) among 102 entities was reverse repoed to it (an average of just under $2 billion per counterparty) in what can only be characterized as the most grotesque temporary open market operation conducted by the Fed in history."

The announcement is the latest in a series of amendments to the aggressive new rules that regulators drew up in reaction to the 2008 financial crisis, in an effort to make the financial system safer. Much of that fine-tuning has had the effect of softening the impact of the new rules, as the industry has managed to persuade regulators that their plans were overzealous. Sunday's announcement follows a similar relaxation of a new rule on minimum liquidity standards at the start of last year. It also follows a significant dilution in the U.S.'s so-called Volcker rule, which is an attempt at curbing speculative trading by banks, and signs from the European Union that it will soft-pedal parallel plans of its own.
Banks will have to report their leverage ratios from 2015 onward, and regulators intend to force them to have a ratio of at least 3% starting in 2018, but there is no binding commitment to the latter. 
When regulators first drew up their reactions to the crisis, they were unable to agree on how to calculate the leverage ratio, owing to differences between U.S. and international accounting standards. Even now, regulators view it as more of a complement, or backstop, to the new risk-adjusted capital standards of the so-called Basel III accords, which have come into force around much of the world over the past year.

The leverage ratio has been criticized as being too crude to be an effective measure of banks' capital adequacy, because it makes no distinction between, say, the riskiness of a three-month U.S. Treasury bill and a 10-year loan to a company in a country in the middle of a civil war. 
However, the measure has gained increasing favor with regulators and politicians in the last couple of years, precisely because of its simplicity. The U.K. has already introduced a binding 3% leverage-ratio requirement on its banks(NOTE: the "UK".... NOT the City of London) and the U.S. plans to go well beyond the 3% minimum ratio envisaged by Basel.

Both the old and the new Basel frameworks allow banks to decide themselves how risky their businesses are via "internal ratings-based" methodologies. The financial crisis exposed how many banks had systematically used that freedom to under-report their risks, and regulators hope that having the leverage ratio as a backstop to the risk-adjusted measures will help stop lenders from gaming the system. This is called putting the compulsive gambler in charge of the casino.

In addition to the changes to the leverage ratio, the Basel Committee also offered a new consultation on a draft rule enforcing a minimum standard of liquidity over a one-year period. The so-called net stable funding ratio will now give greater recognition to bank funding that runs for between six and 12 months. It also slightly eases the treatment of loans to small and medium-size businesses, allowing banks to assume that loans with short remaining maturities will be repaid. However, it tightens requirements in some other areas.


Support Stillness in the Storm

Sign up for Gaia TV

Sign up for Gaia TV
By signing up through this link you also support SITS