Tuesday, January 8, 2013

WSJ: Rules for Lenders Rleaxed: Regulators Agree to Ease Requirements for Meeting Guideline on Liquidity


by David Enrich, Geoffrey T. Smith, and Andrew Morse Wall Street Journal Mon Jan 7 2012, p. C1, C3.

[Excerpted] Basel, Switzerland-Global banking regulators watered down a key element of their plan for creating a safer financial system, giving ground to banks that argued the rules were unworkable and financially risky... Bowing to two years of intense pressure from the banking industry, the regulators made it easier for banks to meet the rule, known as the 'liquidity coverage ratio,' and delayed its full implementation until 2019. 

It is the latest instance of regulators chipping away at their landmark 2010 response to the global financial crisis....

Majia here: The banks remain INSOLVENT and that is why these liquidity rules are being loosened.

Why are they insolvent? The answer lies in the outstanding derivatives, whose worth has been compromised by debt defaults

In 2011 there was $250 Trillion in Outstanding US Derivatives Contracts (consisting of Interest Rate, FX, Equity Contracts, Commodity and Credit Default Swaps). 5 Banks accounted for 96% of that derivatives exposure. http://www.zerohedge.com/news/five-banks-account-96-250-trillion-outstanding-derivative-exposure-morgan-stanley-sitting-fx-de

I think Max Keiser and Stacy Herbert provide the best analyses of how the banking system struggles to keep the juggling act going.http://maxkeiser.com/?s=derivatives+bubble

Majia here: The problem is that the banks' insolvency keeps credit tight, as reported by the Wall Street Journal in an article today titled "Big Banks Settle Mortgage Hangover" 1/8/2012 p. A1:

[Excerpted] "mortgage credit remains scarce for all but the least-risky customers, leaving millions of borrowers unable to take advantage of Federal Reserve policies that have sharply reduced financing costs"...

Majia here: Although it is true that Americans have too much debt, the banks' tight standards disallow people from re-financing their debts, which decrease the probability of default.

The risks for ongoing defaults on debt because of the inability to refinance and because of downward pressure on household income mean that the value of the gigantic outstanding derivatives will continue to deflate.

Banks asset sheets will deflate as their derivative holdings deflate.

Unfortunately, regulators are simply making it easier on banks by loosening liquidity requirements rather than addressing the problem of this huge amount of outstanding junk called derivatives.

This move by regulators is part of the never ending game of extend and pretend.



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