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America First Comes To Basel

President Trump weaponizes global banking regulation.
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By Gage Skidmore from Peoria, AZ, United States of America (Make America Great Again hat) [CC BY-SA 2.0], via Wikimedia Commons

By Gage Skidmore from Peoria, AZ, United States of America (Make America Great Again hat) [CC BY-SA 2.0], via Wikimedia Commons

This week, a group of mostly pale, bespectacled men gathered along the banks of Rhine, hoping to mark the 10-year anniversary of the beginning of the financial crisis by finalizing rules for banks designed to prevent the next one. And they are so close: There’s just one thing left to do, and that’s the set minimum capital requirements.

"The committee continues to make progress in reaching agreement on the output floor, including at this week's BCBS meeting," Basel Committee Chair Stefan Ingves said in a statement.

"Importantly, there is a keen desire among all BCBS member organisations to bring this to a conclusion as soon as possible."

One can forgive him for it, but it seems Mr. Ingves may be a bit too optimistic. For it seems that the one part of banking regulation that the Trump administration and its allies like—high capital requirements—is the one that the normally eager-to-regulate French and Germans don’t. On the other hand, the Americans are less thrilled about certain rules that have already been agreed upon.

The U.S. Treasury published a review of regulation on Monday which recommended delaying two core Basel III rules already agreed….

A banking source said those comments from the Treasury may have soured the mood at this week's Basel meeting. "The Europeans don't want the United States to use Basel to punish them," the banker said.

And yet, here we are: Steve Mnuchin & co. are pushing hard for the parts that will Make American Banks Great Again by Making European Banks Worse, while blithely planning to ignore the parts that don’t Make American Banks Great Again. Progress, indeed.

ECB’s Villeroy Says Bank Capital Talks Must Be Wrapped Up [Reuters via NYT]
Basel says making progress on new bank capital rules [Reuters]


Let's Talk About: Basel III

The Fed last night unleashed eight zillion pages of Basel III implementation on the universe and I'm tempted to be like "open thread, tell us about your hopes and fears for capital regulation." So do that! Or don't because it is super boring, that is also a valid approach. Still I guess we should discuss. Starting slow though. Banks have to have capital, meaning that they have to fund some of their assets with things that are long-lived and loss-absorbing, like common equity, rather than with things that have to be paid back soon and at face value. The reason for this is that the rest of banks' assets are funded with things that we really do want to be paid back soon and at face value, like deposits, and if the value of those assets declines you don't want those deposits to be wiped out. The rules say that you need capital equal to a percentage of your assets. The game is deciding (1) what that percentage is, (2) what is capital (proceeds from selling common stock, and actual earnings, yes, but, like, deferred tax assets?), and (3) how you count assets (you might want more capital to shield you from losses in, say, social media stocks than you would to shield you from losses in Treasury bonds, so regulators use "risk-weighted assets," so that $1 of corporate bonds counts as $1 of assets, $1 of Treasuries counts as $0 of assets, and $1 of Facebook stock counts as $3 of assets*). Anyway, here are the required capital levels:

Chaining them up in the tower on Maiden Lane was a non-starter. By Beyond My Ken (Own work) [GFDL or CC BY-SA 4.0-3.0-2.5-2.0-1.0], via Wikimedia Commons

Banking Culture Isn’t Going To Change So Why Bother Trying?

How do you regulate banks these days? How do you hold a moonbeam in your hand?