News from the Lending World The Office of the Controller of the Currency (OCC), the Federal Deposit Insurance Corp. (FDIC) and the Federal Reserve Board (FRB) recently signed onto a minimum 3 percent reserve requirement for lenders which is the benchmark recommended for lenders set when the 27-nation Basel Committee on Banking Supervision (Basel III) met in 2010. It has taken 3 years to implement this change. Also, for the eight largest U.S. banks, the FDIC, the FRB and the OCC have proposed stricter rules to raise the tier 1 capital leverage requirement beyond this 3 percent level by an additional 2 percent of assets for parent companies and an additional 3 percent for their depository banking units. This change would hold these lenders more accountable by requiring them to fund more of their trading strategies with their own capital reserves rather than by using borrowed money as the banks are doing now. Failure to comply with this stricter level of reserve requirement would prohibit the banks from granting large executive bonuses. Failure to comply would also restrict future dividend pay-outs. Bankers say that this higher reserve requirement could also trigger asset sales in large amounts and reduce stock buybacks (which could reduce demand to purchase bank stocks). The Federal Government wants to redistribute financial risk. They want to begin to neutralize the trend that big banks can continue to expect to be able to privatize their profits (keep the money that they make in the short term on risky investments) while socializing heavy losses (ask for taxpayer bailouts when their Wall Street risky investments flop). At the end of March 2013, according to the latest available data, JPMorgan Chase NA held $70 trillion in derivatives contracts. Citibank NA held $58 trillion in derivatives contracts. Bank of America held $45 trillion. Morgan Stanley Bank NA held $3 trillion of the company’s $47 trillion in total outstanding derivatives contracts. To put this in perspective, Fannie Mae currently guarantees a little under $3 Trillion in residential mortgage debt for the entire country. The four above-mentioned banks are currently holding $176 Trillion in derivatives contracts. Some of these contracts are hedged against losses. Still, potential losses (should things go terribly wrong) could be far more money than the combined annual gross domestic products for all the nations in the world combined. Stay tuned. Robert R Fields 07.12.13
Posted on: Fri, 12 Jul 2013 22:42:49 +0000
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