NEW YORK - SIFI regulation will make the financial world inherently unsafe by raising capital ratios to high amounts. This may seem like backwards logic but it is not when you consider the negative externalities caused by an increase in regulation. SIFI stands for systematically important financial institution and its status will likely be designated for the 30 largest financial institutions around the world. The regulation is part of the Basel III banking accords. Basel III which is expected to come into force later this year has already raised the minimum tier 1 ratio from 2.5% to 4.5% with a 2.5% buffer (7%) but larger banks are likely going to require a further surcharge.
How SIFI regulation leads to greater unrest in the markets.
It is September 2008 and the financial world is imploding. Merill Lynch, Wachovia and National City Corporation just imploded but there are strong players in the industry. Bank of America Wells Fargo and PNC came to the rescue and save these firms.
SIFI Regulation hinders the ability for any bank to make an acquisition during hard times.
The big institutions will likely do lots of buying during a financial crisis but SIFI won't allow that anymore. Wells Fargo, BAC and PNC greatly weakened their Tier 1 ratios to acquire these firms. With SIFI regulation none of the banks would have been able to make acquisitions. Most of these banks can easily hold more capital and be very profitable but when prices get cheap such as during a recession. These companies generally weaken their ratios to buy lots of cheap assets. Since these banks are usually profitable they restore their full ratios after the financial crisis.
New SIFI regulation will mean mid sized institutions fail.
There will be more calamity on the financial markets by limiting the availability of big institutions to buy mid-sized institutions (i.e. around $100 to $500 billion) . Since more medium institutions will fail, all SIFI does is avert a big banking failure and causes more mid size ones.
That is assuming SIFI does what it says.
As we mentioned in our previous article tier 1 ratios are a poor way to measure safety (SIFI Regulation Makes Little Sense)
In a future economic crisis here is what happens.
Strong banks cannot buy weak because they will lower their tier 1 ratio.
Weak Banks cannot be bought so they fail.
More banking failures and less mergers mean more calamity.
Big Institutions may still need to be bailed out.
The next economic crisis caused by the very thing made to prevent it.
How SIFI regulation leads to greater unrest in the markets.
It is September 2008 and the financial world is imploding. Merill Lynch, Wachovia and National City Corporation just imploded but there are strong players in the industry. Bank of America Wells Fargo and PNC came to the rescue and save these firms.
SIFI Regulation hinders the ability for any bank to make an acquisition during hard times.
The big institutions will likely do lots of buying during a financial crisis but SIFI won't allow that anymore. Wells Fargo, BAC and PNC greatly weakened their Tier 1 ratios to acquire these firms. With SIFI regulation none of the banks would have been able to make acquisitions. Most of these banks can easily hold more capital and be very profitable but when prices get cheap such as during a recession. These companies generally weaken their ratios to buy lots of cheap assets. Since these banks are usually profitable they restore their full ratios after the financial crisis.
New SIFI regulation will mean mid sized institutions fail.
There will be more calamity on the financial markets by limiting the availability of big institutions to buy mid-sized institutions (i.e. around $100 to $500 billion) . Since more medium institutions will fail, all SIFI does is avert a big banking failure and causes more mid size ones.
That is assuming SIFI does what it says.
As we mentioned in our previous article tier 1 ratios are a poor way to measure safety (SIFI Regulation Makes Little Sense)
In a future economic crisis here is what happens.
Strong banks cannot buy weak because they will lower their tier 1 ratio.
Weak Banks cannot be bought so they fail.
More banking failures and less mergers mean more calamity.
Big Institutions may still need to be bailed out.
The next economic crisis caused by the very thing made to prevent it.
No comments:
Post a Comment