PrefBlog

Regulators have discovered there’s one teeny-tiny problem with quality: it costs money:

A push to water down stringent standards proposed last year by the Basel Committee on Banking Supervision, and to allow more time to implement them, is led by France and Germany, according to bankers, regulators and lobbyists involved in the talks. Representatives from the U.S. and the U.K., who have sought to rein in risk-taking, are willing to compromise on how capital is defined to reach an agreement at a committee meeting that begins tomorrow, the people said.

Another concession may involve granting transition periods of up to 10 years to ease concerns of some member countries that their banks and economies won’t be able to bear the burden of tougher capital requirements until a recovery takes hold. As a result, the amount of capital European banks will be forced to raise in the next two years won’t be as much as investors fear.
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One part of the definition would exclude minority interests that banks hold in other financial institutions when calculating common equity on the theory that they can’t readily withdraw the capital. Many European lenders, which have lobbied against the rule, have non-controlling stakes in emerging-market banks that would no longer count as the highest level of capital, while the assets of the subsidiaries would have to be included in the banks’ risks.
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European banks are likely to win a concession on the minority-stakes rule, according to the people involved in the talks. One possible compromise would allow a bank to count part of its stake in relation to the risk the capital is supposed to cover at the entity in which it invested, the people say.
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A study released in June by the Institute of International Finance, which represents more than 375 financial companies, said the regulations could erase 3.1 percent of gross domestic product in the U.S., the euro region and Japan by 2015. About 9.7 million fewer jobs could be created over the five-year period than would otherwise be the case, the IIF said.

Regulation is “never free,” said Bank of New York Mellon Corp. Chief Executive Officer Robert Kelly, who visited London and Brussels in June to meet lawmakers and regulators with the Financial Services Roundtable, a Washington-based industry group. “There has to be some impact on growth and jobs.”

The Basel committee, whose members have touted the benefits of financial stability, is preparing its own economic impact study with the help of the Bank for International Settlements in Basel and the International Monetary Fund.
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Banks currently need to hold capital equal to a minimum of 8 percent of risk-weighted assets. Half of that must be Tier 1 and half of the Tier 1 needs to be common stock. The Basel committee might triple the common ratio requirement and double Tier 1, [Paul Miller, an analyst for FBR Capital Markets] estimates.
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BNY Mellon’s Kelly said the original Basel proposals would have forced some banks’ return on equity, a measure of profitability, to mid-single digits.

“If that was true, then they effectively become government utilities, because you couldn’t really raise capital in the private markets after that,” he said.

The IIF report is titled Interim Report on the Cumulative Impact on the Global Economy of Proposed Changes in the Banking Regulatory Framework and is available via a lengthy press release.

I will be most interested to see the promised regulatory response to that and will review the papers on PrefBlog when available … but I am ecstatic that this is being discussed. In Canada we – or OSFI and the politicians, anyway – are always touting the benefits of a very highly capitalized banking system, but never discuss the cost; and there is a cost. That’s a lot of capital tied up that could be invested in other things. I’m not saying I advocate lower capitalization … what I am advocating is an honest debate.

The Canadian experience is interesting … with banks, we obsess about stability and never discuss cost, whereas with electricity we obsess about cost and never discuss stability.

A good day on low volume for the Canadian preferred share market, with PerpetualDiscounts gaining 11bp and FixedResets up 15bp.

Naturally, the poster child for the financial crisis is the American homeowner, flim-flammed into buying a house and now being foreclosed. But see Subprime mortgages: Myths and reality for one take on this … and now it’s hitting the papers:

Whether it is their residence, a second home or a house bought as an investment, the rich have stopped paying the mortgage at a rate that greatly exceeds the rest of the population.

More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic.

By contrast, homeowners with less lavish housing are much more likely to keep writing checks to their lender. About one in 12 mortgages below the million-dollar mark is delinquent.

Though it is hard to prove, the CoreLogic data suggest that many of the well-to-do are purposely dumping their financially draining properties, just as they would any sour investment.

One of the big problems with the US system is that, typically, mortgages are extended without recourse. Instead of layering on extra rules, as I reported Fannie Mae did on June 23, simply charge a premium for non-recourse mortgages. Piece of cake, and one big source of problems eliminated.

Low volume today, but prices did OK, with PerpetualDiscounts up 7bp and FixedResets up 5bp.