Federal Reserve On Verge Of Proposing New Capital Rules For Banks

The Federal Reserve is expected to roll out new rules soon that could make big banks keep more capital reserves on hand, presumably leaving them with less money to lend. The idea is to make banks act more responsible with their stacks of chips and not need the government to bail them out.

CNNMoney reports the Fed’s proposed rules will apply to 31 banks that boast more than $50 billion in assets.

CNN’s sources say the announcement will come this week and could go into effect next year. Larger required cushions are expected to make banks behave more conservatively and hopefully stave off a future financial crisis. Big banks will argue a tighter loan market will put the hurt on business growth, stifling the economy.

Fed close to new financial buffers for banks [CNNMoney]

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  1. Evil_Otto would rather pay taxes than make someone else rich says:

    Big banks will argue a tighter loan market will put the hurt on business growth, lowering their obscenely huge profits.

    FTFY.

  2. pop top says:

    “The idea is to make banks act more responsible…”

    LOL

  3. madcatcasey says:

    Now if only the government would follow the same logic.

  4. alSeen says:

    Before anyone comments on this, they should really read this article.

    http://en.wikipedia.org/wiki/Reserve_requirement

    In short, increasing the reserve requirement will cause the money supply to decrease.

    • pop top says:

      But wouldn’t it be a good thing if we had less loans available, so that people who couldn’t afford to pay them off couldn’t take them out (i.e. because banks have a smaller supply of money to loan out and would be more cautious with said loans), which is what caused a portion of the problems we’re experiencing right now?

      • alSeen says:

        Not saying it’s good or bad, just that it’s important to be educated about economic principles.

        It affects everyone, not just those that “can’t afford to pay them”.

      • Bsamm09 says:

        The better idea is to not have the gov’t guarantee loans or bail out the big banks if they make a mistake that pushes them into bankruptcy. This would provide an incentive for the banks to not make risky loans in the first place. Should be a normal control on any business but, unfortunately, it seems to be the exception nowadays.

      • rpm773 says:

        Sure, less available credit means fewer defaults for those prone to do so. But there are other borrowers besides those looking to buy McMansions and cars that they can’t really afford.

        A business that is otherwise financially doing fine needs a line of credit from its bank to operate: to make payroll, to buy raw materials, etc.

        If this action by the Fed reduces the money supply, you could see the business unable to retain that line of credit that it needs to operate, or see costs increase through higher interest rates. Overall, this could put a strain economic growth.

        I’m not a macroeconomist, so I’ve no comment as to whether this action is right or wrong in the current climate. But the the above is one effect of it.

      • the Persistent Sound of Sensationalism says:

        I was taught never to loan money that I couldn’t afford to give away. The banks should have learned that lesson with their predatory lending. They lent money to people who couldn’t afford to pay it back, and made it so difficult to pay back that the bank ends up with nothing. If they’d actually had a decent amount of reserves, they would not have been in as much trouble. This is only one aspect of the poor business decisions that have become “best practices” for banks lately though.

    • Loias supports harsher punishments against corporations says:

      I didn’t need to read that to know that what this meant. I think most (all?) of us figured out that more money in reserve means less money to lend.

      • alSeen says:

        One of the important parts is that it’s exponential. Most people don’t realize that.

        If you start with $1000 dollars and a 10% reserve ratio (holding $1000 in reserve after everything works through) it will result in $10,000 in circulation and $1000 in the bank.

        If you start with $1000 dollars and a 20% reserve ratio (holding $1000 in reserve after everything works through) it will result in $5,000 in circulation and $1000 in the bank.

        This is the extreme situation of someone taking out a loan and depositing it all into a bank account (which arguably happens eventually, since even if they spend it, the person they buy something from will deposit it, or someone else down the line will).

        • the Persistent Sound of Sensationalism says:

          That’s… not exponential. That’s using a multiplier; in this case – 2. If you went from $10k in circulation and $1k in reserve to $10k in circulation with $1m in reserve, that’s exponential because that’s $1000 squared.

    • nearly_blind says:

      Your a bit confused. Capital or capital ratio requirements in the OP are something totally different than reserve requirements that you sited in wikipedia. Reserve requirements are the percentage of deposits that must be held in cash and not lent out (invested in risky assets such as loans, etc). This is NOT the same thing as captial requirements or capital ratio, which is the percentage of bank/shareholder money that must be invested in risky assets relative to what it borrows from others. I also elaborate on this in a reponse to SIRWIRED below.
      It can be confusing because the Capital Requirement percentages and Reserve requirements percentages happen to be in about the same range, e.g. ~10%, but they are not the same thing.

    • Fubish says: I don't know anything about it, but it seems to me... says:

      I doubt it – they’ll just use it as an excuse to jack rates. But then again, if it’s on the internets and Wikipedia, it MUST be true!

  5. SPOON - now with Forkin attitude says:

    There is no real affect here since the banks aren’t lending money anyway.

    • qwickone says:

      -1 Banks ARE lending money, but only to the people who need it the least.
      /Work at a bank and we had a record for new loans this year.

      • humphrmi says:

        -1 for every 100 refi’s, regardless of need, 4 homes are saved from foreclosure the knock-on effects (more work for appraisers, underwriters, etc.) Also banks are being more particular about the condition of houses in refi’s, which is adding to the home repair and construction markets as folks fix up their homes in preparation for refinancing.

        It might not be much, but every little bit helps.

        That’s on top of the fact that you’re wrong, people who need to refinance to balance their budgets are getting approved, as long as they’ve managed the financials responsibly (I can think of two people besides myself who have done this this year.)

        • Fubish says: I don't know anything about it, but it seems to me... says:

          Holy shit! 4% of re-fied homes are saved. Wowee.

          • humphrmi says:

            So instead we should tighten up lending so that no refi’s go through, zero houses are saved. That’s better, again, how?

  6. sirwired says:

    Those banks are full of it. They have more cash right now than they know what to do with (hence obscenely low rates on deposits.) I don’t see how this could possibly restrict credit availability when they are already reluctant to lend, despite piles and piles of nearly free capital.

    • TuxthePenguin says:

      Part of the reason that they aren’t lending is that they have raised the requirements to get loans to such a high level that alone has slowed it down.

      Heck, the credit facility I have for my company had to be renewed and they asked for audited financials… they’d never asked for that before. Not in a decade that I’ve been on my own…

      • Bsamm09 says:

        Audited? I’ve seen a lot of clients needing reviews but not many more audits than normal. That sucks. An audit isn’t cheap.

        • TuxthePenguin says:

          Yeah, I know. I’m a CPA, so I know how much an audit costs. I raised hell and told them that if they wanted audited financials, THEY would be paying for them as I had no reason to issue them as I was the sole owner. That didn’t quite work, but when I threatened to pull my accounts and tell every client I’d steered their way to move their accounts, it worked.

          Luckily, I deal with a small, local bank. Never had an issues with them until this. I bet it was someone being an idiot and not realizing the difference between a review and an audit.

          • Bsamm09 says:

            I’m sure that was the case. People just seem to use “Audit” as a blanket term when they need financial statements sent to a third party. Once we explain audit v. review v. comp, they realize they don’t need an audit after all.

      • Remarkable Melba Kramer says:

        I will say as a banker that a lot of that is coming from the bank examiners, not the bank itself.

    • nearly_blind says:

      Deposits are not capital. Deposits are debts owed to depositors, or loans of funds made to the bank. Borrowing money from depositors, the Fed, or from the money market at low rates doesn’t increase bank capital. This increases their assets and liabilities which cancel.
      Simplified, capital, is the book value of all their loans, investments, etc (assets) minus the value of their debts including bank deposits, money market and fed borrowings, etc (liabilities).
      A good way of thinking about is it is that the capital or capital ratio is the amount of their own money (shareholder) that they are investing (or gambling with) in loans, mortgage securities, etc relative to what they borrow from others. Very loosely its similar to the amount of down payment on a house, e.g. if the required captial ratio is 10% then the bank must invest at least 10% of there own shareholder money in all investments with some risk. If you think about it at these levels is easy to see how easy it is for the banking system to crash has it did. At a 10% capital ratio, if their investments drop 10% (not that much as we’ve seen recently), the bank becomes insolvent/bankrupt and requires a federal bailout.

  7. dolemite says:

    Funny they’d argue “hurting small business”, when they aren’t lending to anyone anyhow.

  8. maruawe says:

    Won’t work, The big banks will still go where the most money is in their greedy quest to get more money and the feds will bail them out AGAIN

  9. dicobalt says:

    The problem is that real estate is too expensive. The prices are all pulled out of a hat and inflated.

  10. Bryan Price says:

    Let’s see, we’ve expanded the money supply three times in an incredibly short time, which would be inflationary if it actually got spent, but instead, the banks are sopping up the cheap money the Fed is loaning out and buying American treasuries (which still suck as an investment, since they really aren’t keeping up with inflation, but it seems to be the best, most reliable investment currently, even after the S&P downgrade) and managing to make a profit off of it. Still.

    Getting rid of the TBTF institutions to begin with, and the Fed wouldn’t be having to make this change.

  11. neilb says:

    The line you need to know but that is absent from the summary:
    From 8% (current) to 10.5% (under new rules) by 2019.
    According to those rules, banks by 2019 will have to hold 10.5% of their assets in reserve, up from 8%. In the years leading up to the financial crisis, some Wall Street firms had capital cushions as low as 3% of assets.

  12. pythonspam says:

    A lot of these restrictions come about because financial institutions carry too much risk (via leverage, their debt-to-asset ratio). By making them hold more capital, you are trying to ensure that they are able to deal with debts that go bad (as some percentage of debts undoubtedly will.)

  13. Kevin says:

    It’s hilarious that the Federal Reserve would be bold enough to tell any other entity to be more responsible. It’s like your little burn-out cousin who flunked out of college and is mooching off his parents telling you, as a careered employee and homeowner, that you need to get your shit together.

  14. dush says:

    “The idea is to make banks act more responsible with their stacks of chips and not need the government to bail them out.”

    You know how to accomplish this idea? Make it abundantly clear there will be no bailout, no printing of money, nothing. Then follow through.

  15. sweetgreenthing says:

    Bring back Glass-Steagal. That’ll help. Remember how well it worked before? (Not sarcasm)

  16. Telekinesis123 says:

    “The Federal Reserve is expected to roll out new rules soon that could make big banks keep more capital reserves on hand, presumably leaving them with less money to lend”

    Banks do not lend out their own money, nor do they need real assets to back up what they lend out, in the States I believe it is they only have to have $1 for every $10 they lend out, so in essence they created $9 out of thin air and lend it out at interest and seize real property with their fictional money they made for themselves and they have zero liability, though they sure act like they do when their seize your property. It’s the biggest giant criminal scam in history, and only Banks and their other chums get to do it. they print money for themselves, lower the value of yours as a tax but the only people who are putting real assets and value into the system is us with our time end energy from which we create value, they add no value only steal other people’s time and energy like a giant parasite on a nation and the whole world. It’s called Fractional Reserve Banking and is the main cause of inflation, look it up yourself.