Two weeks after European and Japanese banks threatened mutiny against new banking capital requirements set forth by the Basel Committee, Bloomberg reports that Wall Street would have to come up with billions of dollars in additional capital in a proposed revamp of the Fed’s stress tests. US bank stocks are sliding on the news, falling back to the reality of lower and flatter yield curves as well as systemic threats from Deutsche Bank.
The European banking system is in trouble. Despite stocks relatively sober reaction, Sub CDS are exploding higher…
William Coen, secretary general of the Basel Committee, told reporters on Sept. 13 that the regulator’s goal is not to drive capital requirements higher as it finishes up Basel III.
“If we wanted to increase capital, that would be far easier than what we’re doing at present,” Coen said.
“We’re doing this work to reduce risk-weighted asset variability. And why are we doing that? To restore confidence in the risk-weighted capital ratios and to fully restore credibility to the capital adequacy framework.”
And now the US banking system is seeing threats mount systemically and The Fed warns its new stress tests "would generally result in a significant increase in capital requirements"…(as Bloomberg reports)
As the Fed has previously signaled, it is considering changes that would raise the minimum capital targets that each bank has to have to receive a passing grade, Fed Governor Daniel Tarullo said Monday. But the Fed is also mulling concessions that Wall Street has sought, such as eliminating its assumption that lenders would continue to pay out the same level of dividends and buy back shares during periods of severe financial duress, Tarullo said.
The purpose of the overhaul is to try to merge stress testing with related capital rules, including incorporating the largest banks’ so-called capital surcharges that each bank must meet based on how big and complex it is, Tarullo said in prepared remarks for a speech at the Yale School of Management in New Haven, Connecticut.
“This would generally result in a significant increase in capital requirements,” he said.
Tarullo has been indicating for months that the Fed plans to ramp up capital demands in stress tests and Wall Street has been anxiously awaiting the agency’s proposal. The exams already represent the highest capital hurdle that U.S. banks must clear to show they can survive a hypothetical crisis devised by regulators, such as an extended economic downturn. What bankers may not have been counting on was that the Fed might add something besides surcharges to the mix.
Tarullo said the central bank will swap out its old 2.5 percent capital conservation buffer — one of the pieces tallied into each firm’s capital target — for a new “stress capital buffer” derived from each firm’s own stress-test results. That new number is the product of a simple subtraction: How much capital the bank starts with before the stress scenario the Fed hatches, minus how much the firm has at its lowest point in the nine quarters of the hypothetical stress period. If the institution started with 13 percent and dropped to 8, its buffer is 5 percent. And the buffer won’t be allowed to be less than the old 2.5 percent.
And US banks are sliding…
And, as we concluded, after European and Japanese banks threw a tantrum over Basel demands last week…
So to summarize: German, Italian, and Japanese banking regulators just admitted that it they are forced to meet The Basel Committee's (long-warned) capital regulations there will be chaos… and therefore Basel should back off or they will all revolt and leave (signaling to investors that they are – for intent and purpose – under-capitalized as far as the world's top regulator is concerned). Now we have just one question – will you leave your cash on deposit at any of the banks that 'mutiny' from global risk regulations? ….. Thought not.
And now, after Tarullo's comments, it makes you wonder about those "fortress balance sheet" US banks too, eh?
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