The Great Banking Hoax (NYSE: BAC) (NYSE: JPM) (NYSE: C)

NEW YORK - Basel III will go down as the great banking hoax and scare that has become one of the biggest farces that banks ever seen. In the last year 272 banks have asked for clarification on the new rulings (http://www.bis.org/publ/bcbs165/cacomments.htm).

Well capitalized banks like PNC Financial and J.P. Morgan question the ratios and say they make little sense. For instance banks must now own a certain amount of liquid assets to pass Basel III regulations but the capital the bank has to hold that is considered liquid puts well capitalized banks like JPM at 40% of the requirement and this is because of the assets being counted as liquid. According to Basel during a crisis only U.S. treasuries cash and a few select items are treated as liquid.

A second problem is the idea of counterplay risk which makes no sense. PNC Financial owns $7.2 billion worth of stock in Blackrock and has $20 billion of tangible capital. The framework from Basel believes since BlackRock is another bank that the two are connected so therefore PNC owning capital in this bank would be double counting since BlackRock raised $7.2 billion of capital to get the investment.

This might at first appear intuitive but it makes little sense because BlackRock and PNC are public companies and PNC's stake in BlackRock does not need to be sold back to BlackRock it can be sold to any institution or any investor.

However the great banking joke has come down to risk weighted assets. Regulators are trying to skirt the issue but we may have just figured out why Switzerland does not mind having high tier 1 ratios because their banking system is a farce.

According to most recent data Switzerland Bank, UBS had 15.1% of their assets risk weighted. The whole idea of having assets being risk weighted is the assumption that non risk weighted assets have no risk and only the risk weighted assets have a chance of going down in value. In aggregate only 15.1% of UBS's assets were risk weighted. On 2.3 CHF trillion of assets in 2007 that would be $345 billion of assets which can potentially go down. a 10% ratio applied to that would mean the most the bank expected assets to go down would be 34.5 CHF billion. Yet, UBS has raised over $80 billion of equity and debt since 2007. Meaning the company clearly had exponentially higher risk than they were stating. UBS has leverage of 95 to 1 in 2007. And they currently have leverage of 36 to 1. This compares to BAC which has leverage of 10 to 1.

Right now UBS say they have risk weighted assets (RWA) of 200 billion CHF with 1.3 trillion CHF of assets even though the bank has 250 CHF billion of loans. Currently most U.S. Banks have 100% risk weights on loans but lets say UBS has 50% on 260 CHF of loans so we are already at 130 CHF of RWA. The company currently has a 228 cHF billion trading portfolio subtracting out Swiss, US and Japan debt and giving a 30% risk weight to the other assets we would have a further 34 billion of RWA. We are already at 164 billion CHF without considering their derivative book or repurchase agreements.

U.S. Banks have substantially higher risk weights. JP Morgan had a ratio of 55.5%, while Bank of America was at 64.3%. European banks tended to be lower, with Deutsche Bank at 18.2%, Barclays at 26.7% and BNP Paribas at 30%.

Until this hoax or joke is solved there is no way regulators can proceed with implementation of regulation that will so substantially affect banks differently.