Global Regulators Back New Bank Rules To Avert Future Meltdowns

Banks must triple the amount of cash they keep on reserve under a new set of guidelines backed by a global group of regulators this Sunday. With a more generous than expected deadline for the rules to take effect, financial stocks perked up on the news.

The recommendations still have to be ratified by the G-20 group in November, and then have to be implemented by individual nations, who fill face pressure from their banking sectors to dilute them to their benefit.

Banks warned than the new rules will restrict their ability to offer credit during a time when consumers need it most, but backers said that any downside is more than offset by the value of having a financial system that won’t as easily implode.

Regulators Back New Bank Rules to Avert Crises [NYT]

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  1. Loias supports harsher punishments against corporations says:

    Everything just devestates those banks, doesn’t it? They always seems to have some excuse.

  2. TuxthePenguin says:

    While I understand the point, if these rules had been in effect before the meltdown, would it have mattered?

    I think what gets lost in all this complications was the simple fact what took down the banking industry were bad loans. Yes, credit-default swaps and derivatives made a bad situation worse, compounding the problems when banks securitized the loans.

    Shouldn’t, then, the major change me to tighten lending standards? IE, only loan money based on the ability to repay? Sure, there is always a risk involved, but that’s what the risk-premium part of the interest rate is for…

    • Beeker26 says:

      The problem wasn’t unknowingly giving out bad loans. The problem was knowingly giving out bad loans for the purpose of collecting insurance on those loans.

      These new regulations make it that much harder for a company like AIG to bankrupt itself thru it’s own scamming greed.

    • mac-phisto says:

      can we honestly boil all this down to just the “simple fact” of bad loans? i find that hard to believe. writing bad loans will take down ONE financial institution, but an entire global financial system? that points to a more systemic risk than bad loan underwriting.

      i don’t think we can point to one single cause or one catch-all solution. triple reserve requirements? big deal. this will just make banks more aggressive in their investing to make up the interest income lost on those funds.

    • ARP says:

      Yes and if you a lot more in reserves, even if a number of those loans go belly up, you won’t need to get a bailout, you’ll have your own reserves to rest on. But you do make a good point. It should be increased reserves + tighter lending + no too big to fail institutions.

      You can actually get rid of the tigher lending via reserve requirements. For example a certified subprime loan (income checked, etc.) should have a 3 to 1 reserve ratio (one dollar in reserves for every two dollars loaned), a regular loan could be 4 to 1, a “liar loan” can be 1.5 to 1. We can debate the exact ratios, but the reserves should match the relative risk.

      • mac-phisto says:

        that’s not what these regulators are suggesting, though. they’re suggesting an across-the-board increase in common equity from 2% to 7%.

        the most important change has already been made (with little fanfare) when FASB incorporated new accounting rules last year that require financial institutions to account for “off-balance sheet assets”. THIS is what caused most of today’s problems with capitalization & as long as we can keep transparency in accounting, we should avoid future pitfalls.

        in reality, bankers will find a different loophole large enough to suck us into another economic black hole in approximately 10-15 years.

        • sonneillon says:

          Hopefully I will be in a position where the government bails out my company and the company gives me a 20 million dollar severance package.

  3. jessjj347 says:

    Banks are just worried that they won’t be able to invest quite as much with so much cash. Perhaps it also limits the amount of loans possible?

    • TuxthePenguin says:

      Based on fractional reserve system we use, you’re correct.

      If you raise the capital requirement (ie, what fraction you must keep) then you decrease the amount that they can lend.

      Then again, I think that’s a good idea. Just wished they’d have tightened the lending requirements as well.

  4. Cantras says:

    Every time banks whine about “these new rules will ruin us,” I’m reminded of something that happened where I live.

    I live in a college town, and a lot of the older fraternity buildings were grandfathered when the building code started requiring sprinklers. For ten years, city council debated whether they should require them to get up to code. Finally they decided they would — they’d give them 5 years, and then they could file for a three-year and a two-year extension. So they had 10 years to do it.
    One of the fraternities whiiiined and cried that they were a small house and renovating to include sprinklers would bankrupt them and their members would be homeless. Excuse me? You have *ten years* to do it, and you had *ten years* of seeing this coming down the pipe that you could have been saving for it. Furthermore, the building right next to you burned clear to the ground (sans sprinklers) 2 years ago — And yet you still have to be *ordered* to get sprinkler systems, and you hedge your complaints under trying to protect your brothers??

    If you can’t do things to protect your customers without being ordered to, you’re going to get ordered to. Suck it up, buttercup. You’re getting these rules because you have a history of cocking up badly without them.

    • TuxthePenguin says:

      While I agree in principal, lets modify your story to fit what is actually happening.

      Rather than having to install sprinklers to prevent fire, they decide that you need to reduce the amount of furniture in the house by 20%.

      You might think that’s crazy – reducing the amount of (flammable) material would reduce the fire hazard, but not as much as a sprinkler system.

      The system was taken down by too many bad loans. But instead of installing sprinklers, the world banks have decided to rearrange the furniture. Sure, it helps, but that’s not the real problem.

      • Cantras says:

        The point of the story was not to be an exact analogy to the new rule. I absolutely wish they’d have more rules and, yes, rules that made better sense in context. But the other thing I wish is that banks would comprehend why this is happening — “this” referring to all new banking regulations, not just this one odd one.

      • Elcheecho says:

        except your ability to make bad loans is directly related to the amount of furniture you have. am i following your analogy correctly?

    • Ben Popken says:

      I was waiting for the part in that story where you said, “and then their house burned down.”

      • Cantras says:

        I actually lived in that house (briefly) and that would probably be one of the best things that could happen to it. That doesn’t help with the “I have no sympathy to banks” story though. *cough*

    • Cantras says:

      Edit: I do not know whether this fraternity has its sprinklers in yet, but I can see that they aren’t closed, and they still get pledges so it’s not like they’ve raised rents/fees/whatever so high to turn them away.

  5. FrugalFreak says:

    What does this mean? more fees to get that reserve?

  6. IThinkThereforeIAm says:

    Or, as an alternative, hold banks to the same standard as all other businesses.
    If you don’t manage your resources well, you go down in flames.
    And management that allows it to happen would sink with them.
    I know it’s a radical concept, but maybe, just maybe, bank managers/CEOs would think twice before embarking on high-risk investments.

    • ARP says:

      Because banks have gotten so big, that they would drag down the entire economy if they failed. In order to do what you propose, you’d need to shrink the size of banks so they don’t have a systemic risk the overall economy.

      • IThinkThereforeIAm says:

        So, you’re saying they’ve got us by the proverbial balls?
        They can pretty much do whatever they want, and we have no recourse because punishing them (or let them punish themselves) is in effect punishing ourselves?

        Isn’t this against everything capitalism stands for?

      • Conformist138 says:

        If a company is that big, it’s too big. Something similar to anti-monopoly laws should apply. Too big, too much power, and holding everyone hostage. Break them up, make them smaller, then tell them to sink or swim with the rest.

  7. AllanG54 says:

    These rules are phased in over EIGHT years. So, nothing drastic will happen overnight except the amount of excuses banks will have to charge high rates while paying historic lows to depositors.

  8. smo0 says:

    “Banks warned than the new rules will restrict their ability to offer credit during a time when consumers need it most”

    No… they just won’t be able to give high risk credit out to people at inflated rates anymore furthering the downfall of the system… boo hoo.

    And yeah, stability is worth much more than the average joe with shaky credit buying a house…

  9. ptkdude says:

    How will the banks afford that?!?! Tripling the reserve amount from zero is just not possible.

  10. FatLynn says:

    Ah, one more dog and pony show to brainwash the public into thinking that the government gives a sh*t.

    • savvy9999 says:

      correctamundo on this point. this won’t change a GD thing, except to keep the torches and pitchforks at bay for another news cycle.

  11. guspaz says:

    Our banks here in Canada seemed to do just fine during all this nonsense… and they still turn a tidy profit.

  12. grapedog says:

    who the fuck cares about triple the amount of money in reserve, if they are still leveraged 30:1 or 50:1?

    These kinds of laws are a sham, and they do nothing to prevent the banks from becoming leveraged to the hilt. If I remember my reading from 2 years ago, AIG was leveraged at almost 100:1… 100 dollars out for every dollar they actually had. So now AIG would only have been leveraged 100:3 or 33:1….

    They should put a leverage limit on banks, you can’t be more than 15:1 or 20:1 for leverage, which is still an INSANE amount if people started pulling their money. Of course, the government put in the FDIC for this exact reason. So leveraged banks wouldn’t crumble when it was actually time to pay the piper. Could consumers get a fucking bone please…

    • kingmanic says:

      The reserve rule does change it from 50:1 to 14:1. They used to require 2% now they require 7%. Essentially they are making the banks do what you suggested. Various bank entities skirted this rule by repackaging their loans into Collateralized debt obligation and calling it an asset. thats how AIG got into a 100:1 situation; they massaged the books to look like they had less leverage than they did. I think there are some rule changes about that too.

  13. SPOON - now with Forkin attitude says:

    to get commercial mortgages now takes 25% down payment, not 20. Credit is already restricted.

  14. maruawe says:

    We should not have bailed them out to start with. most are greedy ******** ( so and so’s ) anyway
    Their really using our money to get rich off the backs of customers. This is why I work with a credit union and have done so for twenty five years