A good idea, right? Could have gone a long way in preventing the 2008 financial crisis whose effects are still widely felt..
Some don’t seem to think so, arguing that it would force banks to curtail lending
Bove: New Bank Reserve Rules to Spark Global Recession
Monday, 27 Jun 2011 12:49 PM
By Forrest Jones
A recent recommendation for banks to set aside more capital to shield them from financial shocks will only throw the world back into recession, says Dick Bove, vice-president for equity research at Rochdale Securities.
Global regulators working under the auspices of the Group of Governors and Heads of Supervision (GHOS) have proposed requiring banks to set aside extra capital to serve as a cushion, depending on the banks’ size and systemic importance.
Big banks will need to have 9.5 percent or even 10.5 percent tier 1 common equity ratios, if the proposal is adopted, Bove writes in a market note, CNBC reports.
Forcing banks to hike capital requirements will put those banks in a position to lend less, and more lending is needed to speed up global recovery, especially after the damage that money-printing stimulus measures and misguided regulatory policies have done to banks still reeling from the global recession.
“The legislators and regulators never understood what caused the financial crisis,” Bove writes.
“They have never acknowledged their part in facilitating the events that led to the crisis. Now having failed miserably in meeting their responsibilities on the way in to the crisis, they are perpetuating their mistakes by over-reacting by swinging in every direction without regard to the consequences.”
U.S. bank regulators have said European financial institutions do need to exercise more constraint when cushioning themselves from risk.
“Just as troubling is that European banks continue to effectively set their own capital requirements using internal risk estimates,
unconstrained by any objective hard limits,” says Federal Deposit Insurance Corp. Chairman Sheila Bair, according to MarketWatch.
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This is all scaremongering. Banks sitting on more than a trillion of reserves (which even earns interest). Little or no constraint on lending (credit demand from creditworthy parties might be another problem). Stronger banks are an absolute necessity, we should never let what happened a couple of years ago happen again.