My new podcast episode is out.

Pam and Russ Martens — Federal Bank Regulator Drops a Bombshell as Corporate Media Snoozes

Last Monday, Thomas Hoenig, the Vice Chairman of the Federal Deposit Insurance Corporation (FDIC), sent a stunning letter to the Chair and Ranking Member of the U.S. Senate Banking Committee. The letter contained information that should have become front page news at every business wire service and the leading business newspapers. But with the exception of Reuters, major corporate media like the Wall Street Journal, Bloomberg News, the Business section of the New York Times and Washington Post ignored the bombshell story, according to our search at Google News.

What the fearless Hoenig told the Senate Banking Committee was effectively this: the biggest Wall Street banks have been lying to the American people that overly stringent capital rules by their regulators are constraining their ability to lend to consumers and businesses. What’s really behind their inability to make more loans is the documented fact that the 10 largest banks in the country “will distribute, in aggregate, 99 percent of their net income on an annualized basis,” by paying out dividends to shareholders and buying back excessive amounts of their own stock.

Hoenig writes that the banks are starving the U.S. economy through these practices and if “the 10 largest U.S. Bank Holding Companies were to retain a greater share of their earnings earmarked for dividends and share buybacks in 2017 they would be able to increase loans by more than $1 trillion, which is greater than 5 percent of annual U.S. GDP.”...

Hoenig also urged in his letter that there be a “substantive public debate” on what the biggest banks are doing with their capital rather than allowing this “critical” issue to be “discussed in sound bites.”

Much more in the post.

Wall Street On Parade
Federal Bank Regulator Drops a Bombshell as Corporate Media Snoozes
Pam Martens and Russ Martens

Paul H. Kupiec — The major flaw in big banks' argument against the leverage ratio

Excessive leverage was a primary cause of the financial crisis, and yet big banks and even some government officials appear eager to relax rules that limit leverage at the largest U.S. financial institutions. But banks’ argument for why such reform is necessary doesn’t hold water.

Large banks say the risk-insensitive nature of the Basel III Supplemental Leverage Ratio (SLR) restricts market liquidity by increasing banks’ cost of holding so-called “safe” securities and derivatives for market-making activities. A proposed change to the leverage ratio would remove those assets from the SLR calculation. But the proposed change would allow more leverage which could amplify the alleged liquidity problem....

The Treasury’s solution is to deduct the institutions’ holding of central bank reserves, U.S. Treasury securities and initial margin for centrally cleared derivatives, from the SLR’s total leverage exposure. This is equivalent to risk-weighting the SLR components and setting some weights to zero.

Using regulatory data, my estimates suggest that these changes could increase the SLR reported by some G-SIBs by more than 1.5 percentage points — or the equivalent of gaining roughly $40 billion in new Tier 1 capital — just by making a few “minor” technical changes to the SLR calculation.

Make no mistake, the Treasury’s proposed SLR rule change would allow G-SIBs to increase their leverage. And this is why the large banks’ argument in favor of changing the SLR is so thin.…

The Treasury’s proposed changes to the SLR calculation will not restore the incentive for banks to get back into safe market-making activities.

Much more in the post, but the discussion here at MNE has been focused on the bank reserves, the leverage ratio, and the Treasury proposal. Kupiec argues that it's necessary to look at the big picture.

American Banker
The major flaw in big banks' argument against the leverage ratio

Paul H. Kupiec | resident scholar at the American Enterprise Institute

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