Who Has Tougher Bank Regulations, US or Europe?
The two bits of regulation are at tension with each other. One bit is saying you should have more funding with a longer duration and the other is saying watch out when buying this stuff if you are an insurance company. It’s a big problem for banks.”
-Simon Hills, an executive director at the British Bankers’ Association
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Why all the sturm und drang about bank capital? A recent report from McKinsey (?) stated that current business models project European banks “will have a long-term liquidity shortfall of 2.3 trillion euros in eight years.” That’s equal to half the banks’ total capital and liquidity deficit under Basel III. For comparison’s sake, the U.S. banks’ deficit is 2.2 trillion euros.
Enter “European Union’s Solvency II regulations.” These are supposed to be implemented in 2013. The rules create a conflict between insurers, who tend to buy bank bonds, and banks, who need to raise capital.
Bloomberg explains:
“European banks are being forced to sell more long-term bonds as regulators seek to prevent another financial crisis. European insurers say their own regulator will stop them from buying such debt.
Basel III’s liquidity rules mean European banks may need to raise as much as 2.3 trillion euros ($3.2 trillion) in long-term funding, according to New York-based McKinsey & Co. Insurers, the biggest buyers of such debt, are being dissuaded from buying long-term bonds under the European Union’s Solvency II rules, which makes them more expensive to hold.”
Even without new solvency rules, bank regulators seem to be struggling to entice insurers to buy new bank bonds. Given how well bank management has managed risk the past decade, can you blame the lack of appetite on Insurers?
This issue is likely to impact numerous other issues — the end of ZIRP, regulatory changes, banl capital rules, even FASB 157 — may see the impact of these bank capital rules . . .
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Source:
European Bank Funding Threatened as Basel III Meets Solvency II
Kevin Crowley
Bloomberg, March 29 2011
http://noir.bloomberg.com/apps/news?pid=20601087&sid=aSs2opdNoafw&pos=1
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March 29th, 2011 at 7:52 am
Bank regulation is an oxymoron. This is like Barry and I comparing who is less capable of dunking a basketball.
March 29th, 2011 at 9:10 am
HEHEHE Says:
March 29th, 2011 at 7:52 am
Bank regulation is an oxymoron. This is like Barry and I comparing who is less capable of dunking a basketball.
reply:
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Add dyslexia to my personal issues. At first I through you wrote about playing drunken basketball.
Of course the similarities between current bank management science and drunken basketball are strikingly similar. The game starts out as any game would. Then someone passes a bottle and beer flows freely. Creativity ensues. New and more interesting local rules enter the picture and the game steadily changes from a competitive effort into whatever the players agree to do and/or can’t stop anyone else from doing. Some players vomit. Others are injured by themselves or by bullies. Eventually the game disintegrates and the park district is left to clean up the mess. After a few days rest, the players are back out looking for a pick up game.
March 29th, 2011 at 9:31 am
So what, exactly, is the problem here? Banks need to issue more long-term instead of short-term debt, so their balance sheets will be safer. But there are limits to how much they can sell to insurers, since we don’t want the whole damn financial system to collapse (again) the next time a handful of banks are shown to have made stupid decisions. I don’t have a problem with that.
If banks can’t lend as much because they have a smaller pool of funding to draw on, is that a bad thing? Either they’ll borrow elsewhere at slightly higher interest rates, or they won’t lend as much. And borrowers will have to go elsewhere, e.g. to the corp bond market, where they’ll be able to borrow directly from, among others – insurers!
Sounds like some bankers and insurers are upset that they’ll have to run their businesses slightly differently from how they did before. They’ll have to face a different risk-return tradeoff, and may have some slightly tougher decisions to make. Boo-f-ing-hoo, guys.
March 29th, 2011 at 10:23 am
a tough contest
as the US and europe have the serious worlds most broken financial systems.
and are therefore bringing up the rear of world recovery.
so we might ask who has the lamest bank regulation.
I vote for europe. They are even more adamantly opposed to marking bad assets than the US.
i had two talks with bundesbank pres Weber, what a big blustering blowhard, quite unGerman.
in early 2008 in a small group talk he unintentionally gave me a heads up that europe would totally lie and deny on bank losses even more than the US.
in early 2009 one on one for 5 mins he was even more adamant on totally avoiding mark to market and taking losses.
while he walked away from becoming ECB head (i dont know why) that is the thinking over there. They did– unlike the US– give some bank bondholders a haircut,
which is why they are whining now about being at a “competitive disadvantage” in offering taxpayer insured bank funding ( read bondholders) and lending rates
March 29th, 2011 at 10:33 am
Is this a trick question ? …. Ans. Neither
March 29th, 2011 at 10:35 am
Sounds like they are complaining about actually having to pay bond-holders for the risk their so demonstrably subject investors to. So you can’t just fock up destroy trillions and have the gobinment come clean up and pay for the mess next time also; buh-hu how unfair ???
March 29th, 2011 at 11:28 am
may be OT, but eerily relevent
Goldman Sachs wants your pension
http://golemxiv-credo.blogspot.com/
March 29th, 2011 at 2:20 pm
obsvr-1,
The same general topic of Banksters shaving the sheeple is covered by Kathlenn Barrington in her outstanding blog. Wish we had journalists like her in this country.