Tuesday, June 20, 2017

Gregg Gelzinis — Treasury wants to weaken a crucial post-crisis capital requirement

A proposal by the Treasury Department that would allow large banks to exclude certain assets in calculating the leverage ratio is not only a misguided recommendation that would undermine post-crisis capital requirements for Wall Street. The recommendation also appears to be in direct contradiction with the leverage ratio principles outlined in the Treasury report’s own appendices.
On June 12, the Treasury released the first in a series of financial regulatory reports in accordance with an executive order signed by President Trump in February. Among the report’s worrisome recommendations is to modify the denominator in the Supplementary Leverage Ratio, or SLR. Specifically, Treasury recommends removing certain assets — cash held at central banks, U.S. Treasury securities and initial margin for centrally cleared derivatives — from what top-tier holding companies must include in maintaining a 5% SLR. This essentially makes it easier to meet the SLR requirement.
Here’s why that’s a problem.…
American Banker
Treasury wants to weaken a crucial post-crisis capital requirement
Gregg Gelzinis | special assistant for the economic policy team at the Center for American Progress

11 comments:

Matt Franko said...

So deposits at the Fed carry risk??????

Matt Franko said...

This is bullish....

Matt Franko said...

Current policy is causing the banks to assign $200b of capital to maintain deposits at the Fed... and this is what is causing the fluctuations in the other bank assets like loans etc... was also the cause of the GFC...

André said...

"was also the cause of the GFC"

The leverage ratio requirement was the cause of the GFC? That's new... never heard before... why is that?

Matt Franko said...

Fed added 100's of $billions of these assets to bank balance sheets in a very short time while bank capital remained fixed.... so banks had to reduce other assets in order to maintain a fixed LR....

Tom Hickey said...

so banks had to reduce other assets in order to maintain a fixed LR....

How did they do this at the time?

Ralph Musgrave said...

Arguments about whether bank capital ratios should be for example 5% rather than 4% fail to see the wood for the trees. Or if you like, those arguments amount to fiddling while Rome burns.

As Milton Friedman explained, there’s a good argument for imposing a 100% ratio on banks or other similar entities which lend. That 100% ratio has already been imposed on money market mutual funds: that is funds which lend to anything more risky than government cannot classify the stakes that people buy in such MMMFs as deposits. I.e. those stakes must be allowed to fluctuate in value like shares.

One good reason for the 100% ratio, as Friedman explained, is that it bars private banks from creating money, a process which the Nobel laureate economist Maurice Allais claimed was as good as counterfeiting.

As a recent Bank of England article explained, the vast majority of the country’s money is issued by private banks, not government or central banks.

I’m not allowed to print money and nor are other followers of the Mike Norman blog. If you asked Jamie Dimon or Lloyd Bankfiend why they should be allowed to print money, you find they’d go all coy and evasive. They’d try to tell you they weren’t doing it.


Neil Wilson said...

"As Milton Friedman explained, there’s a good argument for imposing a 100% ratio on banks "

When you're quoting Friedman in aid, you're scraping the barrel.

Nobody around here is impressed with Credentialism. We know none of these characters have a clue what they are talking about. In fact it is a logical fallacy - Appeal to Authority. Nobody in mainstream economics, particular those with Chocolate Nobels, have any legitimate authority whatsoever.

You may as well quote the Pope.

"is that it bars private banks from creating money"

It doesn't at all. Everybody creates money all the time. You create money when you pick up a loaf of bread in Tesco. That's how you can walk around the rest of the store holding it without 'paying'.

All 100% reserve schemes do is change the funding costs of bank 'deposits', which increases the price of loans.

Much like a leverage ratio.

Both fail because they don't address the root cause of the problem - banks lending money for silly things.

Ralph Musgrave said...

Neil, Re "credentialism" I actually rather agree with you. However, quoting famous people impresses 95% of the population, so I frequently do it.

On the other hand it's not just Friedman who opposed private money printing: so did at least three other Nobel laureate economists and numerous economists, so the its unlikely at the very least that there is a simple glaring flaw in the "ban private money" idea.

Re your idea that a trade debt (the debt you owe Tesco) equals money, I'm afraid there is no way that fits with money on the normal definition. Money is defined in text books as something like "Anything widely accepted in payment for goods or services or in settlement of a debt". I'd love to know exactly how anyone can walk out of Tesco, still owing $X re the loaf and bread, and pay for a pint of beer in the local bar using that debt. That's sheer nonsense.

Re your claim that 100% reserves increases the cost of loans - why? The only significant difference between a depositor and a shareholder is that depositors are insured via FDIC, whereas shareholders go in for self insurance. There is little reason why the TOTAL cost of those two is much different.

And finally, re your claim that 100% reserve does not address what you call the "root cause of the problem" namely banks making silly loans, the advocates of full reserve have never claimed 100% reserve does solve that problem. Please try reading up the subject before commenting on it.

What full reserve DOES MEAN is that when a bank makes silly loans, it cannot possibly go bust: all that happens is that the value of the shares fall. At least for bank failure to take place under full reserve, the value of all loans made would have to collapse to zero: a level of incompetence way beyond anything we saw in the recent crisis.

Matt Franko said...

Well they obviously didn't open a new credit line for Lehman Bros.... and btw if you research this the whole QE thing was Milton Friedmans idea..

Tom if a bank has customer UST bonds in a customer Treasury account it's not a bank asset its the customers

So Fed comes in and buys the bonds up and reserve assets of banks increase and have a capital requirement of about 10%....

Banks just can't shit capital ...

They started this in September 2088 by 100s of billions so the banks have no choice they have to accommodate the Fed not Lehman Bros.

And like Neil says they are the price setters so the price of all other bank assets has to come down to maintain the 10% ratio system wide....

Matt Franko said...

Tom ,

0.1 = C/(A + RBS)

If RBS is increased by 20% of A (via QE) then the price of A has to be marked down by 20% as C is constant...

Iow say C=1, A is 10 and RBS is 0, if Fed increase RBS to 2 (so "banks have more reserves to lend out!"), then price of A has to be marked down to 8.... i.e. GFC...

When they start to let the QE run off this will reverse.... it'll be like giving banks 100s of $b of free capital... i.e. moonshot....