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Banking regulations may be bad for the economy, unbearable for bankers

Banking regulations may be bad for the economy, unbearable for bankers

Are banking regulations getting unbearable for bankers?

Basel III was a long time ago, relatively speaking. Originally published in 2010 and revised in 2011, these new regulations were a direct reaction to the “Great Recession” of 2008. These regulations require higher standards on loan guarantees and forces banks to convert their instruments into common equity before declaring insolvency.

The Basel regulations are aimed at consumer protection – and ultimately preventing such large-scale defaults similar to 2008. The idea is that more real equity being pushed into the system will buffer the banks from risky investments. But these new regulations come with a higher price tag. Are banking regulations getting unbearable for bankers?

Read the fine print

Here is an excerpt from the actual text of Basel III:

“During the financial crisis a number of distressed banks were rescued by the public sector injecting funds in the form of common equity…While this had the effect of supporting depositors it…did not absorb losses incurred by certain large internationally-active banks that would have failed had the public sector not provided support.”

In other words, banks that were “too big to fail” had to be rescued by the public sector to stay viable. This presupposes the theory that had these banks been allowed to fail, for not having adequate equity to back up their accounts, the whole economy would have collapsed.

Well, for anyone who remembers those years, it certainly felt as if the whole economy had collapsed. While the media was busy blaming the banks, few seemed to remember that the banks had been generously absorbing public debt for decades. One British analyst found when the liabilities became too much to bear, the banks had no choice but to file for insolvency.

According to Business Insider, the Basel III regulations require a larger “buttress” for absorbing risks including a 7% commitment of bank assets on every loan and a “minimal capital cushion” of 16 to 20% on every risk-weighted asset. The Feds are even willing to punish high-risk banks for failure to comply.

The fallout is undeniably painful for bankers. Morgan Stanley has let go of some of its commodity and Forex clients in favor of business management. Chase bank is closing 300 branches nationwide to comply with the newest banking regulations. Thousands of employees will lose their jobs – a direct, albeit unintended, hit to the economy.

To discover more about how the new banking regulations are affecting loan pricing, contact us today.

Alan Lee