Friday, February 9, 2018

Short term pain


Article from American Banker quantifying the hit that banks had to take recently due to the Jan 1 tax reform at maybe around 3% of total bank capital and perhaps more to the systemically important banks.

“Banks are going to have to shrink the size of an asset on their balance sheets,” said Bill Reilly, an accountant at Grant Thornton who advises banks. “Their future tax deductions will be worth less.”...if Capital One records a $976 million charge, that represents 3.65% of its total equity capital.

So if you put total system capital at around $1T, then 3% is $30B if you apply a 0.1 Leverage Ratio that implies a resultant system asset reduction of $300B.

Then at the same time fiscal policy this month is adding $200B+ of reserve assets and you have a $500B total system asset level discrepancy which has to resolve in a short time via risk assets being reduced; as the banks cannot control the level of the non-risk reserve assets.

So down we go...





28 comments:

lastgreek said...

Banksters can cry me a river

Kaivey said...

It's tough when you're at the top, isn't it?

Noah Way said...

Nationalize the banks, incarcerate the bankers.

Matt Franko said...

All they have to do is 1. first pass the reform bill that removes the reserve assets from inclusion in the regulatory ratio... then 2. have banks internal control systems recognize this too...

Matt Franko said...

incarcerate academic economists...

Tom Hickey said...

If the leverage ratio is modified by eliminating "safe assets" like reserve balance, what should be introduced to limit systemic risk, which is what the leverage ratio is designed to do.

Under finance capitalism, the obvious control point is accountability, but that is not available owing to asymmetric power. Management is never replaced for incompetence or even criminal behavior of the organization, and moral hazard is removed by the knowledge the industry that it is a vital component of the economy and therefore will always be bailed out rather than put under for insolvency. Nationalization is also out of the question politically.

Banking has back door to the Treasury?

Matt Franko said...

They are non risk assets by definition so if you are trying to regulate systemic risk why include them?

Matt Franko said...

Those people are probably thinking : “ we need to include them because at any moment the banks could lend them out!”

Matt Franko said...

“accountability”

Is not a control parameter... it’s a concept .. you’re trained in Philosophy you always think in concepts...

I’m STEM trained we always think in terms of applied mathematical inequalities...

Matt Franko said...

Tom people at the individual banks are not responsible for the systemic outcomes they are only responsible for the outcomes at their individual banks ... they have to try to make munnie and not run afoul of the govt regulators...

Tom Hickey said...

Tom people at the individual banks are not responsible for the systemic outcomes they are only responsible for the outcomes at their individual banks ... they have to try to make munnie and not run afoul of the govt regulators...

That's right. Pursuit of "shareholder value" within legal bounds.

The legal bounds need to be set to diminish systemic risk and that is the job of legislators and regulators.

The leverage ratio was one of the tools introduced to control system risk.

I agree it is not a particularly appropriate tool, but it is removed, banks can hold more risk assets and lend more.

What should legislators do to instead if they remove or modify the leverage ratio.

MMT economics says regulate the asset side and not the liability side of bank balance sheets.

That would be plain vanilla banking, that is, separate banking from other finance, and setting credit standards, such as those affecting collateral and the amount that can be lent against collateral.

Matt Franko said...

“I agree it is not a particularly appropriate tool, but it is removed, banks can hold more risk assets and lend more. ”

No they can’t the CAR would still be in place to regulate the risk assets as usual...

Matt Franko said...

You might as well sign up for full reserve with Ralph...

Tom Hickey said...

I’m STEM trained we always think in terms of applied mathematical inequalities...


Scientism is what's wrong with the world.

Economics shows that formal models are incapable of capturing the reality of a modern monetary production economy compressively and accurately enough to be useful for policy formulation.

In the first, the system is too complicated to be modeled formally in a way that captures the reality of the system.

Secondly, the system is not only complicated, it is also complex, owing to reflexivity, adaptability, and emergence. This is a fundamental message of Keynes regarding econometrics.

Economies resemble electronic and hydraulic systems, but only by analogy.

The concept of control point has a specific meaning in some context, e.g., material systems. The concept can be used analogously in the case of economic systems, which are not purely physical systems, but biological, including behavioral and psychological. There are also institutional, e.g., legal, aspects, and a moral factor, as well.

The moral factor should be a "control point" but it is not owing to lack of accountability and "human nature." Economists actually recognize this in assuming that representative agents maximize preferences "amorally."

Therefore, law and regulation has been introduced to bridle the law of the jungle.

This leads to the view (assumption) that if it is legal, then it is also moral.

As William Black has documented, banks pursuing "shareholder maximization" are control fraud centers because it is not "shareholder maximization" they are maximizing but "stakeholder maximization," with the stakes high and the distribution of the stakes skewed by power relationships.

Economic models purposely exclude power relationships since they are difficult to quantify. Then the assumption follows, if it cannot be modeled, it either doesn't exist or is irrelevant to the analysis.

Science or BS?

Heterodox economists call BS, but they have not been able to construct sufficiently formal models to overcome the opposition that claims that science requires formal models. No conceptual models admitted.

So we are still waiting for useful policy tools.

Tom Hickey said...



So you are saying that the capital ratio (liability side) makes the leverage ratio (asset side) irrelevant?

Regulators view them as complementary.

I am not arguing to keep the leverage ratio or to change it either.

I am saying the leverage ratio and the capital ratio are poor tools for the intended job of reducing systemic risk. They should be replaced with something like Mosler's proposals for banking and finance, along with Bill Black's recommendations for addressing control fraud.

Matt Franko said...

“the system is too complicated to be modeled formally in a way that captures the reality of the system. “

Well you could start where the regulators wouldn’t periodically reserve the right to flood the asset side with risk free assets and make the depositories insolvent... that might at least be a good starting point... :p

Noah Way said...

Nationalization is also out of the question politically.

Any meaningful reform is out of the question politically. The entire system is a sham. It's a Gordian Knot that needs to be cut.

Matt Franko said...

It’s not that complicated...

jrbarch said...

It is simple, but not in the way Matt is thinking; but as usual, in the way Tom is thinking.

Two little babies in a room. They laugh at each other, make expressions to each other, explore relating to each other. Having fun, being human.

Someone introduces a toy. One baby picks it up, begins to chew on it (tasting quality). The other baby wants it and tries to take it away. The possessor clocks the would-be acquirer over the head with the toy. This too is human nature – 50% good and 50% bad; we choose.

So, what is the ‘control point’?

And do I need a degree in STEM or philosophy to understand it?

(It’s called sharing).

The babies are going to share when they learn for themselves sharing makes them happiest.

But we only know that as philosophy, don’t we? In practice we use STEM to get our way.

A long time ago Socrates said 'know thy self'?

I wonder if he thought that was a solution ....?

Matt Franko said...

“know thy self'?“

I do I’m STEM trained and therefore biased to think in mathematical relationships...

You can’t keep going all around the place saying “loanable funds is false!” all the time and then never illustrate the damage that belief can cause... otherwise WHO CARES if it’s false or not?

So “loanable funds!” is false... ok... why does that matter?

You have to illustrate why it matters or.... YOU... GET.... NOWHERE..... which is exactly where these people are getting...

jrbarch said...

Just to remind: - am using an analogy here; two babies for human nature.

So which one is going to persuade the babies to share - STEM or philosophy?

After that we can use maths to build the airport and have well trained pilots; philosophy to lead the mind to the important questions.

Then Socrates solution makes sense.

Carts. Horses ....

Greg said...

"So which one is going to persuade the babies to share - STEM or philosophy?"


Right! STEM baby says "I need to beat this baby in this one on one matchup to win" Philosophy baby says "We aint the only game out here"

Libertarians are STEM, looking at everything from the individual struggle perspective. Its all a series of one on one matchups. No collective thinking


Think of the scenario where armageddon occurs and you are among the one percent of survivors; STEM person says "I WON!!"
Philosophy person says "OMG we lost"

Tom Hickey said...

Just to remind: - am using an analogy here; two babies for human nature.

So which one is going to persuade the babies to share - STEM or philosophy?

After that we can use maths to build the airport and have well trained pilots; philosophy to lead the mind to the important questions.


Efficiency is doing things right, effectiveness is doing the right thing. — Peter F. Drucker (paraphrase)

Philosophy is therefore prior since it investigates ends (the right things), which are given by values and norms in addition to reasons. STEM and other things that focus on means are secondary considerations. Of course, that is not completely the case in that conceptual thinking is influenced by what is possible. At the same time, it is true, too, that when objectives are set, and means presently lacking, attention turns to innovation.

To put it another way, philosophy focuses on the design problem from the broadest perspective, STEM and other matters that focus on the material are about the specifics of subordinate design problems, elaboration of decision solutions and how to implement them.

Another way of saying it is that philosophy is the basis for policy, and STEM and other material approaches are the basis for strategy and tactics.

We begin with conceptual thinking in setting objectives and proceed to adopt the appropriate tools for the job of achieving the objectives.

jrbarch said...

“know thy self'?“ I do I’m STEM trained and therefore ….

Socrates did not say know thy cat, or know thy dog, or know thy neighbor - know philosophy or know STEM; or know Matt or Tom or jr … He didn’t sit around for decades, thinking, thinking, thinking – and suddenly a light bulb comes on and he writes down ‘oh – you know what, know Joe’.

He said know thy SELF – an entirely different thing altogether. Ergo, knowing thy cat, dog, neighbour, Matt, Tom, jr makes absolutely no difference. This is what the world is like. Everyone knows everyone better; everyone is interfering with everyone else, rather than know their SELF – the very heart of cooperation and unity.

So, back to the babies learning how to share.

I am very sorry to say this, but I think philosophy has failed; and STEM is failing.

If the light does not come on, flicking the philosophy or STEM or 'progress' switch off and on, off and on, is not going to work. But that is what people do, don’t they?

Imho Socrates put forth an excellent solution, that even though people have written thousands of essays about it, very few people understand. Know the SELF. Know that energy inside of you. It will transform you. It will make you kind and generous; human. It will make you happy and content.

People like prophets one way or another. A prophet comes and tells the people: - ‘do so and so, and then you will have plenty of time to find out what it means to be human, and enjoy being alive’.

So came the prophet of agriculture, the prophet of machines, the prophet of transport, the prophet of communications, the prophet of information, the prophet of technology, the prophet of the sciences.

Brought some good stuff with them, but didn’t deliver on their promises did they?

Maybe i’ts time to try something different; something very old and always new. That may be efficient and effective?

How to teach those little babies to share, before they melt up, and reach Armageddon .....? How much stress is the world these days.

Carts before horses ......

jrbarch said...

”We begin with conceptual thinking in setting objectives and proceed to adopt the appropriate tools for the job of achieving the objectives.”

In architecture we were taught V.A.S.T Tom. Four streams feeding into one design river: - values, activities, site, technology. (But nought about teaching babies to share) :-) !

I think the human creative process (as above, so below) is: - Ideal >> Ideas >> Icon.

So an ocean of Mind appears as one little drop in the human mind, apparently separate, and societally conditioned, rather than universally aware.

Tom Hickey said...

@jrbrach

That is true, of course. However, we don't first work on values and norms and only later invent means.

The value system is embedded in a culture, and modern cultures have well-developed technology.

But the logical prior is choosing the right things and then choosing means appropriate to achieving the objectives that have been set by policy.

People are educated to be able to do this, more or less. But most people are only qualified in a particular aspect of the process owning to the division of labor.

However, in a democracy, voters elect representatives to set policy and policy goals based on the values that the various parties embrace. These values are embedded in ideologies and those ideologies are the outcome of application of philosophy.

BTW great architects are often philosophers in their own right in that they are holistic thinkers. Bucky Fuller is a good example.

Tom Hickey said...

@jrbarch

Sorry for the typo in the monicker.

jrbarch said...

Yes – the four streams are confluent in time and space, pouring into a ‘problem space’ where satisfying takes place, often by relaxing constraints. A bit like the wind and waves shaping an island; or writing a piece of music. Somehow, the ideal must take form, through planning and desire. Back and behind of any ideology is an ideal, structured with ideas knit together into a plan, and making through desire, an appearance in the world. Often the ideal is, because of our nature, corrupted in the process.

No worries omT. :-) !