-- The author is a Reuters Breakingviews columnist. The opinions -- The author is a Reuters Breakingviews columnist. The opinions expressed are his own --
By Antony Currie
NEW YORK, June 13 (Reuters Breakingviews) - It may be time for U.S. bankers and regulators to lock themselves in a room and negotiate capital standards. Over the past week, they’ve done this publicly. That’s created unnecessary uncertainty and slammed stock and bond market investors alike. Debate is important. But the way they’ve gone about it seems counterproductive.
Federal Reserve governor Daniel Tarullo kicked the kerfuffle off in a June 3 speech. He hinted that systemically important financial institutions may have to hold as much as twice the Tier 1 common equity buffer that will be required under international standards known as Basel III. That came as a shock. If big banks had to hold that much capital, Bank of America (BAC.N), Citigroup (C.N), JPMorgan (JPM.N) and Wells Fargo (WFC.N) would need $500 billion more capital by 2019.
That didn’t just worry shareholders, who last week wiped out as much as $35 billion from the value of the 10 largest U.S. retail and investment banks. Bondholders also took fright. Five-year credit default swap prices implied funding costs for large banks had risen as much as 12 percent in the week following Tarullo’s speech.
Forcing banks to carry some extra capital should give creditors more protection. But the upper limit implied by Tarullo would render some businesses unprofitable. To bondholders, that signaled banks might have fewer profits from which to pay interest.
By Tuesday, the furor should have died down as the Fed implied that the so-called “SiFi buffer” might only be a smidgeon higher than the Basel III requirements. But that was quickly overshadowed by JPMorgan Chief Executive Jamie Dimon pointedly, and publicly, needling Fed chairman Ben Bernanke about regulation.
Dimon’s remarks were a stark reminder that banks will fight tooth and nail against any rules that crimp profits. Equally troubling was Bernanke’s admission that regulators hadn’t done cost-benefits analyses on new rules imposed on the industry.
For the economy’s sake, both sides need to find a balance that makes the banking system safer, generates sufficient returns for investors and offers incentives for banks to lend money. By the look of it, public bickering may not be the best way to achieve that equilibrium.
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-- Large U.S. banks are crafting their strategy to get regulators to back off from tough talk that they may force the riskiest firms to hold twice as much capital as smaller banks, Reuters reported.
-- The regulators are deciding how much extra capital the biggest firms, whose failure would do the most damage to financial markets and the economy, will have to hold above the agreed-upon Basel III framework calling for a minimum of 7 percent capital.
-- Big banks have been bracing for a buffer that could add as much as 3 percentage points, for a total of 10 percent.
-- On June 3, Federal Reserve Governor Dan Tarullo said the Fed is considering an option where the largest banks may have to hold between 8 percent to 14 percent in total capital.
-- Reuters story: Rankled banks to launch campaign against US reforms [ID:nN09213829]
-- For previous columns by the author, Reuters customers can -- For previous columns by the author, Reuters customers can click on [CURRIE/]
(Editing by Rob Cox and David Evans)
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