The banking system is insolvent by definition of the partial reserve lending (which I among many consider this to be nothing else but legalized fraud), but we have reached extreme levels of leverage ratios, to the point where the Basel III rules cannot be implemented.
What is the limit they are trying to introduce? It is a 33x leverage ratio on Tier-1 capital. And banks are unable to achieve it. What does it say about their solvency? The risks they have taken on their books? The systemic risk they have brought to the system?
Wasn't the bailout all about suppressing the systemic risks? Of course, this is not a free market solution. Free market would mean that there are no leverage ratio, but also that banks would go bust if they do any mistake.
Moreover, partial reserve lending and paper currency should are fraud, but they exist in a free market. But, in a free market, these practices are not legalized by the government and hence, people get to chose, and both the leverage ratio and the paper currencies in circulation tend to be restricted by people's willingness to use them, to deposit in banks that practice such fraud, and by the busts that happen often and in shorter periods, preventing banks to have assets on their book that are several times the size of the countries GDP.
And now, what are the governments, regulators, and central banks doing? They just put their heads in the sand, and hope for the best.
Here are two stories, about Europe and Australia. I am wondering how many more of these stories can be found by digging the news.
Nov. 17 (Bloomberg) -- Banks in Europe may escape global rules designed to limit their debt, as several countries push the European Union to drop a so-called leverage ratio, two people close to the discussions said.Then Australia:
A majority of nations in the 27-country EU oppose introducing a binding leverage ratio that was adopted last week by the Group of 20 countries, according to the people, who declined to be identified because the discussions are private. The countries, including Sweden and France, say the ratio might encourage banks to pursue risky activities, the people said.
The G-20 adopted measures proposed by the Basel Committee on Banking Supervision, including the leverage ratio, to increase the amount of capital that banks hold to protect themselves from insolvency. The rules must be implemented by individual countries or EU directives. The U.S. never implemented a previous set of Basel rules.
The leverage ratio is a “key element” of the package because it will act as a “safeguard” against attempts by banks to get around other requirements linking the amount of capital they must hold to the level of risk associated with their assets, the Basel committee said last month.
The ratio would require a bank to have Tier-1 capital equivalent to 3 percent of its assets, preventing it from accumulating assets worth more than 33 times its capital level. The leverage ratio should, subject to final adjustments, be introduced from Jan. 1, 2018, the Basel committee said.
Almost all EU states have said they oppose implementing legislation that includes a binding leverage ratio, according to the people. The countries are seeking a separate decision on the issue in several years, following further analysis of the financial effect.
The Basel reforms can only come into force if nations adopt them through legislation. The U.S. attracted criticism from EU lawmakers by failing to implement a previous round of international rules, known as Basel II.
The leverage ratio is one of the main changes introduced in the updated Basel rules, known as Basel III. Others include the creation of a minimum short-term liquidity requirement, which is set to come into effect on Jan. 1, 2015, and a so-called net stable funding ratio that addresses banks’ longer term liquidity and is supposed to take effect on Jan. 1, 2018.
Dec. 17 (Bloomberg) -- Australia’s central bank will offer contingency loans to lenders in a plan to help them meet global liquidity rules aimed at averting a repeat of the credit crisis.
The Reserve Bank of Australia will provide secured facilities to cover any gaps between lenders’ liquid assets and global regulators’ requirements, according to an e-mailed statement from the RBA and the Australian Prudential Regulation Authority today. Banks will pay a yet-to-be-determined fee and put up assets eligible for repurchase transactions with the RBA as collateral to access the standby funds, it said.
Global bank regulators in Basel published a so-called rules text clarifying standards yesterday. Regulators, including the Group of 20 nations, are focusing on ways to bolster banks’ liquidity and capital to prevent a re-run of the worst financial crisis since the Great Depression.
While banks in most countries will meet Basel’s liquidity coverage ratio predominantly through holding government debt, there aren’t enough sovereign bonds outstanding in Australia for lenders to buy, APRA and the RBA said today.
The Basel Committee on Banking Supervision wants banks to hold enough assets that can be converted into cash to meet their needs for 30 days in a “severe liquidity stress scenario.” More than 60 percent must comprise securities including cash, central bank reserves, sovereign bonds and debt sold by multilateral development banks, the document states. Up to 40 percent can be assets such as highly rated non-financial corporate bonds and covered bonds.
The liquid asset portfolios of Australia’s four biggest banks currently total about A$333 billion, Westpac Banking Corp. credit strategists Brendon Cooper and Chris Walter wrote in a note to clients today. That includes some securities that won’t be eligible under the new rules, they wrote.