By Pam Martens: July 3, 2013
The Federal Reserve Board yesterday announced that it had “approved a final rule to help ensure banks maintain strong capital positions,” but it was as clear as mud when or if the new rule would take effect and how it would lessen the risk of the too-big-to-fail banks and prevent another taxpayer bailout of Wall Street.
After years of stonewalling on higher capital rules for banks, there was the nagging suspicion that the Federal Reserve decided to talk the talk on tougher standards after the House Financial Services Committee held a hearing last Wednesday that delivered a devastating assessment of how dangerous the largest Wall Street banks remain to the U.S. economy.
Thomas Hoenig, former President of the Federal Reserve Bank of Kansas City and now Vice Chair of the FDIC, reflected the general mood at the hearing when he stated that the biggest banks are “woefully undercapitalized” and that we have a “very vulnerable financial system.” Hoenig strongly advocates the restoration of the Glass-Steagall Act which would force the separation of banks holding insured deposits from Wall Street brokerage firms and investment banks – an outcome fiercely opposed by most of the largest banks’ current management.
The press release from the Fed was almost as large, complex and opaque as the banks it supervises with approximately 700 unnecessary words. Adding to the confusion were more complicated and wordy statements from Fed Chair Ben Bernanke and Fed Board Governors Daniel Tarullo and Elizabeth Duke.
Distilling it all down to facts comprehensible to the human brain delivers the following:
The new rule includes a new minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5 percent; it also raises the minimum ratio of tier 1 capital to risk-weighted assets from 4 percent to 6 percent and includes a minimum leverage ratio of 4 percent for all banking organizations.
There is also this: For the largest too-big-to-fail banks, “the final rule includes a new minimum supplementary leverage ratio that takes into account off-balance sheet exposures.”
But don’t get your hopes up that anything is going to happen real soon. Like the non-implementation of the Volcker Rule in the 2010 Dodd-Frank legislation (which would curtail too-big-to-fail banks engaging in high stakes gambling for the house, i.e., proprietary trading) this rule is still to be reviewed and voted on by the FDIC and the Office of the Comptroller of the Currency. Additionally, there is to be a phase in period for the largest banks beginning in January 2014 and we are not told what the targets are after January 2014.
Will common equity do anything to make the too-big-to-fail banks safer during a financial panic? Perhaps a flash back to a column I wrote on November 24, 2008 will provide some insights into the matter:
“Citigroup’s five-day death spiral last week was surreal. I know 20-something newlyweds who have better financial backup plans than this global banking giant. On Monday came the Town Hall meeting with employees to announce the sacking of 52,000 workers. (Aren’t Town Hall meetings supposed to instill confidence?) On Tuesday came the announcement of Citigroup losing 53 per cent of an internal hedge fund’s money in a month and bringing $17 billion of assets that had been hiding out in the Cayman Islands back onto its balance sheet. Wednesday brought the cheery news that a law firm was alleging that Citigroup peddled something called the MAT Five Fund as ‘safe’ and ‘secure’ only to watch it lose 80 per cent of its value. On Thursday, Saudi Prince Walid bin Talal, from that visionary country that won’t let women drive cars, stepped forward to reassure us that Citigroup is ‘undervalued’ and he was buying more shares. Not having any Princes of our own, we tend to associate them with fairytales. The next day the stock dropped another 20 percent with 1.02 billion shares changing hands. It closed at $3.77.
“Altogether, the stock lost 60 per cent last week and 87 percent this year. The company’s market value has now fallen from more than $250 billion in 2006 to $20.5 billion on Friday, November 21, 2008. That’s $4.5 billion less than Citigroup owes taxpayers from the U.S. Treasury’s bailout program.”