The Flinchum File

Thoughtful Economic Analysis and Existential Opinions
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Happy Bankers, Unhappy Regulators

Scratch a banker and they will tell you they have money to lend and are just looking to make new loans.  Without question, they are honest in that comment.  Of course, if they are candid as well, they will add that credit has to be absolutely 100% perfect to qualify for a loan, which is very different than the recent past.

But, the numbers don’t lie — total loans outstanding have not increased significantly.  Most of what bankers cite as new loans are merely renewals of existing loans, including those that cannot be repaid and are simply “rolled-over,” which is called “extend and pretend” that they will be repaid.

But, there is also something more subtle happening . . . banks have been preparing to comply with the new requirements of the Basel Agreement.

Basel is a charming town in Switzerland, halfway between Zurich and Geneva.  It is home for the Committee on Banking Supervision, which is writing new capital requirements for banks worldwide.  In the aftermath of the global financial crisis, the committee quickly announced that capital requirements would be raised substantially.  Unfortunately, this decreases the profitability of a bank, because it can lend less — if it must keep more of its balance sheet tied up in low-yielding capital.  The banks screamed “bloody murder” (whatever that is).

In addition to capital requirements, the Committee is responsible for setting minimum liquidity requirements for banks.  Last week, they reduced that amount from 5% of insured retail deposits over thirty days to only 3%.  Even worse, the acceptable collateral quality was loosened.  Lobbying does work.  Even better, it pays!?

Less capital and less liquidity in customers does NOT make banks happy.  Less capital and less liquidity in banks DOES make banks very happy.  The good news is that bank lending will probably increase slightly.  The bad news is that there is an old adage that the seeds of the next crisis are sown in the aftermath of the last one . . . Amen!