Regulatory

This is a big fat nothingburger....

We recognize that regulatory capital requirements are only one tool among many that supervisors should use. Activity restrictions, constraints on credit concentrations and liquidity risk, underwriting standards, market discipline, and supervision of risk management and corporate governance practices, among other things, are all indispensable elements of a robust program of oversight for banking firms. But capital requirements have long been and will remain a principal regulatory tool used by supervisors to promote the safety and stability of the banking system.

A principal lesson of the recent crisis is that stronger, higher capital requirements for banking firms are absolutely essential. At the same time, we recognize that stricter capital requirements for banking firms are not without cost. Stricter capital requirements generally will reduce the amount of financial intermediation and may limit credit availability. The objective in designing a regulatory capital regime should be to maximize the prospects for financial stability without unduly curtailing credit availability, financial innovation, economic growth, or the ability of banking firms to attract private investment.

In other words, we'll keep letting people lend out money without any security, either in the form of capital or collateral, waving our arms and claiming that "it will all be ok" when there is no evidence to support that assertion.

Until that changes there has been no reform and no real impact on risk.

Mark-to-market accounting for all assets, and a ban on all off-balance-sheet and other similar games is essential for the stability of individual banking institutions and ultimately the system.

Forcing banks to hold one dollar of capital for each dollar of unsecured lending, where that capital must be immediately liquid (that is, cash on deposit or very short-term Treasuries such as the 4-week bill that can be turned into cash with no penalty within four weeks), is the definition of sound lending.

What is  "unsecured" lending?  It is all money out on loan that is not secured by the net present value of collateral, less rehabilitation and sale expenses.

It really is that simple, and yet this regulatory stance is the only way you can know with any degree of certainty that the banks, and ultimately the banking system, is solvent and can perform its job of credit intermediation in the economy.

The "Wall Street Wizards" refuse to discuss this as does Treasury.  The reason is obvious and clear: They know that once the debate turns to this topic they lose control of the spin machine, as the math is inescapable and once the people get their arms around the concept they will demand accountability - to this standard.

Everyone talks about how "credit is constrained."  The reason it is constrained is that we do not have a regulatory regime that demands that unsecured lending be backed with capital, and as a consequence the response to expected (or known!) shortfalls between capital and loans out is to lie and bury the evidence, hoping that you can earn enough somewhere else to get out of the hole.

Only a regulatory regime that demands dollar-for-dollar capital be held against unsecured lending prevents this sort of fraudulent "hot potato" accounting treatment, forcing institutions to hold leverage to a reasonable level and to raise capital at the first sign of trouble rather than trying to "pretend and extend", hoping not to run out of rope and have the cashflow monster get them.

We will never have true stability in our financial institutions until this is addressed - no matter how many "magic tricks" Treasury, Congress and Wall Street perform.