Monday, September 13, 2010

Basel III: Quick Analysis

The Basel Committee on Banking Supervision’s main governing body, meeting today in Basel, Switzerland, said banks worldwide need to have common equity equal to at least 4.5 percent of assets, weighted according to their risk profiles. Regulators will introduce a further 2.5 percent buffer. Banks that fail to meet that buffer would be stopped from paying dividends, though not forced to raise cash, the committee said in a statement.
So in absolute terms....
1 / 0.045 = 22:1 absolute maximum leverage.
1 / 0.07 = 14.3% leverage beyond which no dividends may be paid.
Sounds rather reasonable, doesn't it?
Well, the latter is. Indeed, it's about what the former legal limit was before Henry Paulson, as head of Goldman, got the SEC to lift it from the investment banks.
An act that, as I have repeatedly pointed out for three years, made possible the blow-off top in both housing and the debt markets, and materially increased the amount of damage done by the financial crisis.
But none of these figures matter a bit unless banks are forced to value assets fairly. And until we see the FDIC stop coming in and taking losses on banks that according to their alleged "call reports" are perfectly solvent, we will not have seen the end of the lies.
I'm sorry folks, but this is all political theater and BS so long as institutions like Wells Fargo (WFC), Bank of America (BAC), Citibank (C) and others can hold hundreds of billions or even more than a trillion - each - off balance sheet without no clean accounting for the value of the alleged "assets", and they both are and do.
By some figures many European banks are running actual leverage ratios closer to 50:1, mostly for the same sort of reasons. The so-called "stress tests" ignored anything not held in a trading book, which was dramatically more than the "trading" amount, and leaves open to question whether there was some hinky re-shuffling ahead of the so-called "test" as well.
The committee has yet to agree on revised calculations of risk-weighted assets, which form the denominator of the capital ratios to be determined this weekend. The implementation details of a short-term liquidity ratio will also be decided by the time G-20 leaders meet, members say. A separate long-term liquidity rule will likely be left to next year.
Yeah, that's one of the scams that has been run too - so-called "liquid assets" that aren't really liquid.
Hint: Only short-term (say, 26 week and less) government bonds andcash are truly liquid assets, as only debt instruments without material duration risk and actual vault cash can be counted on to be turned into cash during a liquidity squeeze. Don't hold your breath on the Basel Clowns restricting the definition to these instruments - in fact, I'll bet anyone a case of Scotch they won't.
Karl Denninger
Mr. Denninger is the former CEO of MCSNet, a regional Chicago area networking and Internet company that operated from 1987 to 1998. MCSNet was proud to offer several "firsts" in the Internet Service space, including integral customer-specified spam filtering for all customers and the first virtual web server available to the general public. Mr. Denninger's other accmplishments include the design and construction of regional and national IP-based networks and development of electronic conferencing software reaching back to the 1980s.

He has been a full-time trader since 1998, author of The Market Ticker (, a daily market commentary, and operator of TickerForum, an online trading community, both since 2007.

Mr. Denninger received the 2008 Reed Irvine Accuracy In Media Award for Grassroots Journalism for his coverage of the 2008 market meltdown.