Banking Regulations and You!
This post is for financial nerds. I know you guys are out there.
So if you are looking for a lightweight read about frugal Christmas shopping or finding the best credit card today, move along (but check back, I’ll write that one soon, I promise!)
If however you want to learn a little and broaden your horizons about how the financial world operates, and maybe argue with me ’bout my opinion, then read on, sons and daughters, read on.
First a little Bank background.
Banks are required to have a savings stash, known as capital, on hand for emergencies. The “stress test” that banks had to undergo after the financial crisis was to insure banks had adequate capital to survive another severe and sudden economic downturn.
Why is this necessary?
Bank failures….When banks are under capitalized, they become susceptible to bank runs. This means you and I rush to take out our money, afraid it won’t be there when we need it. If enough people feel the bank is in danger, then failure is inevitable-the domino effect writ large.
Even with insured deposits, bank failures are a calamity for a community, and especially for the bank’s stock and bond holders.
And if you are sitting there thinking, “This ain’t none’a me, cause I don’t own any bank stocks!” Then maybe you need to think a little more.
You may not hold them directly, but your pension fund or one of your 401k mutual funds probably does. As we found out in the 2008 crisis, and again with the European debacle, it doesn’t take direct ownership of financial or bank stocks for you to be affected.
‘Cause it is likely you and or your employer is already affected directly or indirectly.
Just the threat of these distressed European banks going under has made your retirement fund fall as fast as the request for a Kardashian annulment.
The European crisis has also affected the hiring decisions of that company that was thinking of expanding and hiring your husband, wife, son or daughter.
The economic growth of our country is being severely affected by this uncertainty in the world’s banking system.
Banking Regulators
Now that you have the background info, the topic of today is banking regulations and regulators (otherwise known as bureaucrats.) And before your eyes roll back and your fingers get twitchy to move on, give me just another minute.
A recent Op-Ed in the Wall Street Journal was enlightening. (it scared the piss out of me and should you, if you want to know the truth…)
Peter Wallison’s concern was the way new regulations and the regulators enforcing them are virtually guaranteeing a future crisis for the banking world, in the name of prevention.
The next banking debacle is almost inevitable with the supposed “new and improved” system being used to “judge” a bank’s solvency and stability.
Keep in mind banks are regulated and you and I pay the tab, directly or indirectly. Regulators from different agencies audit banks investments, loans, and capital ratios to make sure banks aren’t in danger of collapse.
The regs and how they are being interpreted by these regulators basically require all banks to have the exact same capital requirements-not a bad thing.
More worrisome is requiring that these capital investments be limited to the exact same investment choices as every other bank. These investment choices are being limited more by the rules interpreter, than the rules themselves.
You may think, well that’s only fair.
The banks in Boston have to have the same capital requirements as the banks in Bainbridge, or Baltimore, or Birmingham. Whether Birmingham is in Alabama or in the British Isles…. “I’m all for everyone being treated the same and look the same, it just makes sense!” you may be thinking.
Well what Peter (sorry) , Mr Wallison has pointed out, is this effort to stamp out risk, and to be “fair” actually does the opposite.
How?
How bout this banking fairy tale:
Every bank in the world has the exact same capital requirement. That requirement is gold, lots and lots a gold!
In their vault, banks are required by regulators to hold a certain amount of physical gold. Those regulators go from bank to bank to make sure that vault held just the right amount of gold for the size and scope of that bank.
Sounds safe enough, huh.
Now what happens though, when the goose that lays the golden egg gets discovered then cloned, or the alchemist finally figures out a way to make gold out of thin air, or more realistically, a huge gold reserve is found (preferentially in my back yard…I know, not very realistic) and the price of gold plummets to nearly nothing.
Every bank that had adequate capital requirements yesterday, are suddenly under capitalized and because the rules were so narrowly interpreted, every bank in the world is in the same boat. The same regulator that said everything was hunky dory today, is now ready to close you and all your cloned cousins down tomorrow.
I know, I know, banks aren’t required to hold a certain amount of physical gold. (That was just a story, sheeeshhhh…)
My point is, when the regulators begin making every bank have the exact same type of capital to meet their capital requirements, then all banks will look alike, which is fine, ’till something happens to the value of that capital.
When that value drops it’s not just one bank affected, it’s the whole damn system. That scares me and should scare you!
Unintended consequences indeed!
I understand the need for doing something!
Many are clamoring for government to do something about the banks. To punish them for screwing up our lives…. let’s be careful not to throw out the baby with the bathwater.
Regulators should give banks leeway to make judgments for themselves making their institution more immune to failure. Not give ‘em free range, but at least a little range…Having the banks capital invested just like a clone of the bank next door, or across the pond, is not the answer.
Let’s actually encourage a diversity of investments-this will make banks and the banking system safer.
Safe banks should make you and I feel a little more at ease, and it will help our retirement funds feel a lot better.
Reader questions:
What say you? You have any thoughts on banking regulations and their enforcement?
Would you rather I write another article about buying your wrapping paper after Christmas to help you save a few pennies????
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