Saturday, September 17, 2011

Sure to make booms higher and busts lower. Wow.

A bank's capital ratio is designed to measure a bank’s capital relative to its risk exposure and is one of the ratios that regulators like the FDIC and the Bank of International Settlements uses to measure the "health" of a bank.  Here is how a banker sees the new regulations:

When I returned to my office this morning I received a call from a trade group person who told me that the new Tier 1 Leverage ratio for banks is now unofficially 9%, up from 5% that has been in place for years.

The combined shock to the system of capping debit card fees, doubling the capital requirement, significantly restricting OD charges plus the impact of 263 new regs from Dodd-Frank and all within 3 years is severe.

The higher capital requirements (almost double) cut the returns to capital almost in half. This is part of the reason that Bank of America's is raising capital from Warren Buffet:

Under the terms of the deal, Berkshire will buy $5 billion of preferred stock that pay a 6 percent annual dividend, and receive warrants for 700 million shares that it can exercise over the next 10 years. Bank of America has the option to buy back the preferred shares at any time for a 5 percent premium.

If you take a step back, we see that the regulators are running a procyclical policy: reducing capital requirements in boom years (before 2008); and raising them in bust years (today).

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