Ho Hum Or Bizarre?

Any one knowledgeable?…leave a comment on winners and losers.

Deal book today describes rather ho hum changes in capital requirements for banks with a positive spin:

FED’S DIET PLAN FOR BANKS The Federal Reserve said on Monday that it planned to increase the pressure on large financial firms to slim down, DealBook’s Peter Eavis writes. In testimony he will give before the Senate Banking Committee on Tuesday, Daniel K. Tarullo, the Fed governor who oversees regulatory policies, signaled the central bank’s plan to propose special capital requirements for the largest banks that will be even higher than those demanded under international banking regulations.

Mr. Eavis writes: “When regulators increase capital requirements, it forces banks to borrow less money to finance their lending and trading. The theory is that banks that rely less on borrowing are more stable because they are getting more of their financing from shareholder funds, which do not have to be repaid at short notice when turbulence hits. But as a bank has more equity funding, it in theory becomes harder for it to earn a return on its shares that satisfies investors. The bank might therefore decide that, to reduce its equity funding, it needs to shrink its assets. And if the largest banks fall considerably in size, they would pose less of a threat to the wider economy if they collapsed.”

Web of Debt describes the set of new rules as unprecedented and negative.

In an inscrutable move that has alarmed state treasurers, the Federal Reserve, along with the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, just changed the liquidity requirements for the nation’s largest banks. Municipal bonds, long considered safe liquid investments, have been eliminated from the list of high-quality liquid collateral. assets (HQLA).

 

That means banks that are the largest holders of munis are liable to start dumping them in favor of the Treasuries and corporate bonds that do satisfy the requirement.

Why this unprecedented move by US regulators? It is not because municipal bonds are too risky, since corporate bonds with lower credit ratings are accepted under the new rules. Nor is it that the stricter standard is required by the Basel Committee on Banking Supervision (BCBS), the BIS-based global regulator agreed to by the G20 leaders in 2009. The Basel III Accords set by the BCBS are actually more lenient than the US rules and do not include these HQLA requirements. So what’s going on?