So, no surprise here, banking stocks are leading U.S. stocks higher today, just like they are in Europe, after the Basel III committee released its proposed capital structure for banks. The main takeaway is that banks under the accord will have to put aside more of their capital for a rainy day.
The initial impression on the Street is that these new rules won’t have much effect on US banks, that they won’t have to raise a lot of capital to meet the new requirements because by and large they already meet them. Citi, Bank of America, Wells Fargo and JPMorgan are all higher, and while every sector is rising, the bank sector is rising twice as much as the next leading sector (materials as of this writing.) The S&P 500 shot through its 200-day moving average right out of the gate.
The feeling is that the rules are “manageable,” as one Citi analyst put it, and given everything these banks have been through, and have put us all through, it’s hard to avoid the sinking feeling that once again, the banks are getting off light.
“Why should Europe’s banking shares tack on a near 2% gain in early trade?” Dow Jones Newswires Alen Mattich wrote (subscription required) from London this morning. “Because the requirements will be imposed only very gently over eight years or so. And banks almost universally already meet most of the capital requirements. That’s because regulators have colluded with them over asset valuation, allowing absurdly overpriced valuations to create the illusion of strong earnings which, in turn, were tacked on to the capital base.”
Yves Smith Richard Smith lists his gripes over at naked capitalism. These include valuation, “capital ratios mean nothing if the assets are overvalued,” and accounting gaps:
Actually, of course, when you come across things like Repo 105, or BoA’s quarter-end balance sheet manipulations, there don’t seem to be any relevant reputable accounting practices at all; even if you think Lehman’s liquidity pool probably is an outlier, some of this stuff really, really needs fixing. And do we think that under Basel III there will be more accounting dodges that will cross the line from ‘asset sweating’ to ‘accounting manipulation’? Not Basel III’s fault, but I rather think we do expect exactly that.
What’s needed in order to prevent another banking crisis, much more than some predetermined equity cushion, is real accounting reform. Unfortunately, the odds of it decreased after the chairman of the Financial Accounting Standards Board (FASB), Robert Herz, left at the end of August. This means, as David Reilly wrote, “this will give banks an opportunity to push for a successor who is more friendly to their views on the mark-to-market question, as well as the overall idea that accounting should be for more than just investors.”
That’s a real shame.
The other thing that’s needed but seems absolutely nowhere in sight is the removal of moral hazard in the form of some government somewhere making it clear that banks can, you know, fail. Since Lehman, governments here and abroad have moved heaven and earth to make sure nobody else fails. Until that changes, until bank investors operate with the knowledge that they can be wiped out in a failure rather than saved by Uncle Sam or some other deepocketed fool, we will be stuck with the lumbering leviathans that continue to suck up valuable oxygen for no clearly good reason.