The Coming Lending Squeeze

Banks Win Watered Down Liquidity Rule to Prevent Lending Squeeze

Global central bank chiefs agreed to water down and delay a planned bank liquidity rule to counter warnings that the proposal would strangle lending and stifle the economic recovery.
Lenders will be allowed to use an expanded range of assets including some equities and securitized mortgage debt to meet the so-called liquidity coverage ratio, or LCR, following a deal struck by regulatory chiefs meeting yesterday in Basel, Switzerland. Banks will also have an extra four years to fully comply with the measure.
Banks and top officials such as European Central Bank President Mario Draghi pushed for changes to the LCR, arguing that it would choke interbank lending and make it harder for authorities to implement monetary policies. Lenders have warned that the measure might force them to cut back loans to businesses and households.
“The new liquidity standard will in no way hinder the ability of the global banking system to finance a global recovery,” King said. “It’s a realistic approach. It certainly did not emanate from an attempt to weaken the standard.”
A sample of 209 banks assessed by the Basel committee had a collective shortfall of 1.8 trillion euros ($2.3 trillion) at the end of 2011 in the assets needed to meet the 2010 version of the LCR, according to figures published by the Basel group.
Banks had warned that the initial LCR proposal would force them to buy additional sovereign debt, more closely tying their fate to governments’ solvency. The 2010 rule was drafted before the EU was fully confronted by a sovereign debt crisis that challenged traditional assumptions about the credit worthiness of government bonds.
Authorities also agreed to water down parts of the stress scenario that banks will be pitted against to calculate whether they hold enough LCR assets. Still, they expanded the range of risks on derivatives trades that will be taken into account.

My view:  

The banking shenanigans continue as central bankers and planners negotiate with their co-conspirators, the private banks to polish their abysmally low tier 1 capital numbers. 

Funniest comment in the article is Mervyn King's "it certainly did not emanate from an attempt to weaken the standard".  Har, Har, Mr. King, have you every considered a career as a stand up central banker comedian?

While the banking crisis of 2008/2009 is largely forgotten, the reality of the every expanding derivatives market and highly leveraged financial institutions has yet to be addressed in a meaningful way.

The shortfall of capital is so large it is unfathomable.

At some point, likely later in 2013 or 2014, we will once again seen another lending squeeze and banking crisis.

Constantly borrowing governments need the banks to buy their crappy bonds to finance the welfare state.

Bankers need to lend more to secure fat bonuses.

By expanding the assets that are considered "good collateral" central bankers have simply papered over the problem again.

How do we know that a problem still exists besides the testimony of a few obscure bloggers to whom no one pays heed?

The IMF just has this paper presented in December proposing creation of a capital buffer.  (Thanks to Bill for finding this treasure).

Just one quote from the paper:

The global derivatives markets in the post Lehman period, despite considerable compression of bilateral positions, are unstable and they can bring about catastrophic failure. Quite simply, a threat of failure to any of the SIFIs is an immediate threat to the others.

The key to understanding the banking and sovereign debt crisis is that banks and governments are like conjoined twins - they are very difficult to separate, and one is unlikely to punish the other as  such action only injures itself.

Rather, the can is continuously kicked down the road until the bond market decides it has had enough.

Then comes the crisis.

Are we prepared for the next credit squeeze?


Post a Comment