Banks Get New Restraints

wsj ^ | SEPTEMBER 13, 2010 | DAMIAN PALETTA

[george76]

Global regulators pushed through a historic remake of the world's banking regulations—forcing financial institutions to increase protections against unexpected losses—with the ripple effects likely to impact everything from mortgages to commercial loans to credit cards in coming years.

The new rules are designed to rein in the kinds of risky activities that contributed to the financial crisis that upended Wall Street and shook the global economy to the core.

Regulators agreed to require banks to hold a specific level of a basic type of capital known as "common equity." Common equity is considered the most effective type of capital because it is used to directly absorb losses. Officials agreed large, internationally active banks will have to hold levels of common equity equal to at least 7% of their assets, much higher than the roughly 2% international standard or 4% standard for large U.S. banks.

Banks will be allowed to phase in these new standards over a period of years, so they will have more time to comply. By 2015, banks will have to begin building a 2.5% "buffer" of capital that must be fully in place by Jan. 1, 2019.

If banks fall below the buffer, regulators could force them to hold onto more of their earnings to augment their capital, which means the companies will have less money on hand to pay dividends or offer large compensation packages. Some analysts believe the new standards could essentially force banks to shrink their loan portfolios or shed other assets in order to improve their capital positions.

[RC one]

they don’t have to a thing until 2015? That sounds just like “they don’t have to do a thing” to me.

[RachelFaith]

Some analysts believe the new standards could essentially force banks to shrink their loan portfolios or shed other assets in order to improve their capital positions.

This is EXACTLY what will happen. You will find it harder to borrow. You will pay more. Period. So much for improving the economy. This is 100% the wrong prescription.

[Army Air Corps]

This is 100% the wrong prescription.

That's the idea.

[April Lexington]

Prior to the 1980s, only people who didn't need money could borrow money. After the 1980s, everyone could borrow money. Period. And now... here we are.

[george76]

Never letting a crisis go to waste.

[george76]

They are timing these things ( Obama Care, etc ) for after the next presidential election cycle in 2012 ?

[Tempest]

Gasp!!! People might actually have to start thinking about buying what they can afford instead of living off of credit!!!

Oh the horror!!!

[RachelFaith]

Prior to the 1980s, only people who didn't need money could borrow money. After the 1980s, everyone could borrow money. Period. And now... here we are.

Prior to the 1980's we have Keyesian Economic's from FDR to Carter. During the 1980's we had free market reforms under Reagan. Then the noose started to be tied back in the 90s under Clinton and the CRA and we have added more and more rules until the system is about to actually collapse. And I don't mean 2008 collapse. I don't mean 1929. I mean Mexico, Germany, Rome, Collapse!

[mainsail that]

Maybe borrowing should be harder. Exhibit A & B: The internet and housing bust when people borrowed easily and drove bubbles.

[sheana]

So who are these ‘global regulators’ should be everyones first question.

[RachelFaith]

The bubbles and the lending crisis was not driven by greedy banks making bad loans.

Let me provide some insight for those tempted to believe Katie Couric and the evening news.

Banks want to lend money. They want to assess credit worthiness and get a fair return. Banks make only a few percent back, the margin is horrible compared to any other business. The only thing that makes it viable at all is the volume. 1% on billions is a lot.

But, in the 90’s under Clinton banks were forced into making bad loans. A law called the Community Reinvestment Act (CRA) and other local and state laws like it, said basically. “No Profiling” and established quotas for lending in certain “geographical” areas. Now, of course this wasn’t based on race... just parts of town that “needed the banks to be GOOD members of the community and help urban blight and such.

Banks were terribly unwilling to do this and most did just the bare minimum and even encouraged certain people with good credit to “move into” these areas and gave them Amazing rates.

This began the whole Urban revitalization movement. Good credit, employed people, could get a big house that needed some TLC in a poor part of town for a fraction of the same house on the “west side” in the Suburbs.

Adding to this, was the unintended side effect that banks needed to make sure the equity was as high as possible, so they began to include loans which had “after fix up” appraisals. or even 120% of value loans.

This created a loan to value swing. Suddenly a new market emerged. Bankers who had a few years of this experience, quit working for the big banks and opened up mom and pop Brokerages everywhere and competed for the loans.

The banks saw this and said “they made the loan but who is going to service it. These start ups have NO “processing staff”. So the banks charged the brokers for the servicing. The brokers passed the fees on to customers and were out of the picture days after the loans closed.

As most good credit people got on quick, that left lower but still fair people left and the brokers were happy to write the loans and make a fee and the banks were happy to have some riskier but far higher rates on the books.

But something happened on the way to the party. Some banks began to see that these brokers were making bang on just fees and so they began to write loans. And as they did, more and more good credit people upgraded their housing to bigger and better. This left the old houses empty, except that they don’t stay that way. Someone has to buy them. So enter Freddy and Fanny.

The government said WE will buy them FOR the Poor. Yea! But. We won’t lend the money, BANKS have to. We will just garuntee them on the tax payers.

So banks, with a free check and brokers who could make fees, piled on.

Some banks did not. Some backs said. THIS IS CRAZY. We will wait until you fall on your butt and then buy you out for pennies.

THIS is exactly what happened.

It was BECAUSE of government intervention.

Banks, on their own, will have JUST enough tightening of credit and just enough margin to survive. If a bad bank makes bad loans, a good bank will buy them out.

I know. I have worked in the banking industry for over 10 years. I specialize in legal compliance with these hundreds of interfering laws. They cost us money. They cost you money. They are a free ride on your back engineered by wealth redistributing socialists.

Thanks

[george76]

Axel Weber, president of the German central bank; The three top American banking regulators — the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency; Jean-Claude Trichet, president of the European Central Bank and chairman of the group, which included financial officials from 27 countries.

[Kackikat]

This regulation of 4.5%,6% or even 7% bank reserve of cash for asset protection is BOGUS BULLCRAP! We never learn from our mistakes, and that is what Obama is counting on, because the financial terrorists are out to destroy our county financially.
REMEMBER PAULSON during the first stimulus trying to CYA his own arse, from the 5 banks who wanted to lower the reserve from 12-14% which had kept America somewhat secure for years to 4% only a few years before in 2004. Those banks who went to the Regulatory AGency and asked for this were BEAR-Stearns,Lehman, Morgan Stanley, Citibank, and Goldman Sachs......so who are they kidding.

Economics 101 is you do not lower the cash reserve below 12% or you are in serious trouble down the road! AT least 20 yrs ago that was the standard, before we sold our sorry rear ends to debt is a good thing.

[goodnesswins]

Actually...THAT was one of my first thoughts...."global regulators?"

[Kackikat]

http://bigpicture.typepad.com/comments/2008/09/regulatory-exem.html

READ THIS ON SEC REGULATORY EXEMPTIONS FROM 12% TO 4% PRIOR TO CRASH...2004

[Kackikat]

http://bigpicture.typepad.com/comments/2008/09/regulatory-exem.html

[Kackikat]

http://bigpicture.typepad.com/comments/2008/09/regulatory-exem.html

[Bhoy]

Thanks for insight.

[RachelFaith]

What a bunch of leftist crap!!!

That blog is horrific in it's assault on capitalism, the free market and blaming the rich bankers.

This is only about the system being required to artifically inflate the value of property to cover manditory lending.

This was a natural correction. The market is FINE. If the government would just stay OUT.

Here it is in picture form. A simple graph showing that in about 2000, the market value jumped, this was a delayed reaction to the rules that were imposed by Clinton.

Bush did not have enough time to have started this, but he did NOTHING to repeal it either.

Then when a few of the more corrupt lenders, like Lehmans, wen't bust, the market corrected.

Look at this graph and see. Where we are right now is NORMAL. If we try to tighten lending for good customers now, while still mandating loans to poor or undocumented (not my choice of words) customers, we will have a BIGGER problem.