Saturday, September 15, 2018

Basel III LCR and HQAL Class Wilting

Basel III liquidity coverage ratio (LCR) and high quality asset liquidity (HQAL) class quality is wilting. Ironically the continuing illiquidity induced global economic weakness has been cited as a basis for the wilting LCR and HQAL class quality1.

UPDATED 09/15/2018 Bloomberg, Lehman’s Long Shadow: Bloomberg Opinion Special Edition and Partners In Debt: An Endogenous Nonlinear Analysis Of Interaction Of Public And Private Debt On Growth and Wikipedia, Bankruptcy of Lehman Brothers (September 15, 2008) and Reuters, Millions of Americans Still Trapped in Debt-Logged Homes Ten Years After Crisis (...write-down "underwater" mortgages on a primary residents acquired in good faith to a lowest market value, without taxing gains or the need to file bankruptcy...)

...there is reason to think that our bankers and regulators et al. are creating a redux of the 2007-2009 global financial collapse (GFC07-09)...nations have not sufficiently recovered from the (GFC07-09), yet...Europe lags the United States' recovery...the shocks created by ongoing trade disputes and our unstable, unfit, unwell, and unbalanced "new" alt-white-house et al. are gratuitous...

UPDATED 09/11/2018 FT, Federal Reserve Debates Banks’ Capital Buffers As Markets Surge is unclear what the benefits of a stress capital buffer are over regular FOMC actions and capitalization requirements (bank flexibility?)...substitute for higher interest rates in an overheated economy?...

UPDATED 08/31/2018 NYT, Inviting the Next Financial Crisis and Yardeni, Global Economic Briefing: Central Bank Balance Sheets

...not only is our unstable, unfit, unwell, and unbalanced "new" alt-white-house et al. inviting the next financial crisis it is complicating the Federal Reserve's ability to finish moping up the 2007-2009 global financial crisis and adequately respond to the next "invited" financial crisis...

UPDATED 07/09/2108 FN, Fed Gave Morgan Stanley and Goldman Help on Stress Tests and FedRes, Federal Reserve releases results of Comprehensive Capital Analysis and Review (CCAR)

...the Federal Reserve "helped"¢ Morgan and Goldman on the quantitative side...

¢...the banks are also being "helped" by congressional efforts to weaken much for the 2007-2008 global financial crisis bailout mantra of "never again"...can we do capitalism without returning to capitalism with cannibal characteristics and the inevitable "never again" bailout?...

UPDATED 07/09/2018 IMF, Global Financial Stability Report October 2017: Is Growth at Risk? and MarketWatch, Citi Among 9 Banks IMF Says Will Struggle To Be Profitable

The downside of spending one (and a half?) decades recapitalising your banks at near zero interest rates. The oft hyped trillion(s) debt-tax-break is unlikely to do for growth what near zero interest rates didn't.

The myth that our wealthy will fund "growth" (wages or GDP) with their debt-tax-breaks (Added 07/09/2018 Reuters, Tax Cuts to Give Little Lift to U.S. Economy: FRBSF Economic Letter)  which they would not fund at near zero interest rate is [fill-in description]†.

† The "repatriation tax break" coupled with near zero interest rates enables corporations to profitably run for years while stockpiling their cash (i.e. tax advantageous low or no cost debt for cash) offshore awaiting favorable tax treatment (tax subsidy). The politician tell voters that the corporations will use their tax subsidy to grow jobs, wages and GDP, but corporations usually buy back their shares or declare dividends, which distributes the tax subsidized funds to investors (Reuters 10/28/2017). Under a proposed tax provision by Senator Hatch the dividend is tax-deductible!

UPDATED 07/12/2017 FedRes, Federal Reserve releases results of Comprehensive Capital Analysis and Review (CCAR) and CSPAN, Monetary Policy Report and Reuters, Powell suggests review of capital rule to boost central clearing

UPDATED 02/15/2017 Bloomberg, Fed's Daniel Tarullo on Bank Risks, Too-Big-to-Fail

UPDATED 11/18/2016 Reuters, Fed's Kashkari unveils plan to tackle 'too big to fail' banks and funds and NYT, Minneapolis Fed Chief Proposes Eliminating ‘Too Big to Fail’ Banks

Increasing banks' equity capital by 10% (from 13%-23%) reduces risk of bank bailout by 58% (67%-9%)4. The downside, if it's a downside, is a significant hit to expected GDP.

UPDATED 10/30/2016 Reuters, Basel gives banks breathing space over new accounting rules and Brookings, BPEA Conference September 2016 Draft, Have big banks gotten safer?

The bankers' bleating that asset value be counted while discounting the asset's risk is deafening.

UPDATED 09/29/2016 FRB, Testimony Chair Janet L. Yellen Supervision and Regulation Before the Committee on Financial Services, U.S. House of Representatives, Washington, D.C. September 28, 2016 Progress continuing, sloooooooooooowly.

UPDATED 06/30/2016 FRB, Press Release Announcing Results of Comprehensive Capital Analysis and Review (CCAR) and CNBC, Fed flags Morgan Stanley, Deutsche, Santander in stress tests; 30 other banks OK (also, IMF, Financial Sector Assessment Program, Individual Country Reports e.g. Germany June 2016)3

Most participating bank holding companies continuing to show improvement as capital requirements increase...

UPDATED 06/27/2016 Reuters, U.S. banks' stress tests may offer comfort in Brexit tumult and Market Pulse, Fed to Release Stress Test Results on Wednesday and Federal Reserve June 23, 2016 Press Release and Federal Reserve, Comprehensive Capital Analysis and Review 2016 Summary Instructions January 2016 (pdf)

The Wednesday results is the more important Part II release (see Part I,  Dodd-Frank Act Supervisory Stress Testing Results, June 2016) of a periodically conducted Comprehensive Capital Analysis and Review (CCAR),  which need regulators to audit overall bank risk and equity given five concocted financial scenarios (i.e. three regulator and two bank).

Unfortunately, many or most, if not all banks and financial institutions (aka cowboy-capitalists) have not embraced and incorporated CCAR into their routine financial and business practices. They begrudgingly (less begrudging of Part I, which is basically a computer crunching numbers) endure it so they can payout equity, while complaining and lobbying2 mightily to end the regulatory regimen.

When you begin hearing our cowboy-capitalists publicly state that they brought on the CCAR regulatory regimen by their unprecedented, arrogant, and ignorant recklessness you will know they've begun behaving like responsible, responsive, and lightly regulated capitalists. (don't hold your breath or go long on the cowboy-capitalists)

UPDATED 06/20/2016 WSJ, FASB Rule to Require Banks to Record Projected Loan Losses Up Front

More financial prophylaxis against our cowboy-capitalists' propensity for creating "financial engineering" fiascoes and other lesser financial diseases.
UPDATED 03/14/2016 NYT, Mutual Funds Oppose S.E.C.’s Plan for a Bigger Cash Cushion

What a surprise, our confused casino-cowboy capitalists oppose regulatory predator prophylactics2.

Specifying liquidity in days seems an easy method for evaluating and measuring risk. (i.e. will money be returned in one, two, three...n day or bankruptcy?)

UPDATED 01/07/2016 CFA, Martin Wolf: How Markets Can Be Rebalanced

UPDATED 12/13/2015 Bloomberg, Leverage Ratio for Banks Can Rise as High as 5%, BIS Says
UPDATED 12/12/2015 WSJ, On Capitol Hill, Another Banking Battle Brews 

Not so long ago shadow banking's (think hedge funds and investment houses) congressional patrons (think former Texas Senator Phil Gramm and then Senate Banking Committee Chairman et al) argued to be treated like banks.

Unsurprisingly, now that the casino-cowboy-capitalists are being treated like banks (think Dodd-Frank Act) their congressional patrons have begun arguing that they should not be treated like banks?

Unfortunately, duplicity has become de rigueur and for many of our congressional representatives vying for corrupting campaign contributions.

BIS, Group of Governors and Heads of Supervision endorses revised liquidity standard for banks
Results of the Basel III [Voluntary-Self Reporting] Monitoring Exercise (pdf), as of 31 December 2011


UPDATED 01/07/2016 BIS, Stress-testing financial systems: an overview of current methodologies

It's difficult to imagine the usefulness of stress-testing, which does not integrate across all financial institutions?

Individually bulls and elephants cause little damage, which is not true during a stampede.

UPDATED 01/07/2016 Wikipedia, Basel III


1. Must be more of that "too hard to understand" derivative reasoning; not to mention dizzying or dazzling circular reasoning.

UPDATED 03/20/2016 2. Those interested in an entertaining book articulating why regulatory prophylactics are necessary may enjoy Akerlof and Shiller's, Phishing for Phools:The Economics of Manipulation and Deception

Those not tired of reading about the most recent efforts by our casino-cowboy capitalists to destroy the global economy will want to peruse footnote one to chapter two.

2. There are, of course legitimate and reasoned concerns about the most efficient capital ratios, risk, economic scenarios, shocks and hedges, audit costs versus benefits etc. It's unfortunate that our cowboy-capitalists' continued recklessness, indifference, and unresponsiveness will likely mean such concerns will fall on deaf ears for many years.

Fortunately, our Federal Reserve will likely interpret statements like "it's too complex to understand" as challenges and not explanations.

3. UPDATED 09/28/2016 Economist, America’s Department of Justice asks Deutsche Bank for $14 billion

4. The post Dodd Frank estimated risk of bank bailout has been reduced by 17% (84%-67%).

Originally Published January 06, 2013; Last Updated September 15, 2018; Last Republished September 15, 2018:

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