The banks have got us by the capital

Bankers have sailed out of the 2008 credit crisis storm largely unscathed, despite the billions paid in fines. As regulators are discovering, the too-big-to-fail banks are now more powerful than ever.

There was a very nice cartoon by Matt Pritchett in the London Telegraph the other day that neatly summed up European bankers’ contempt for the bonus restrictions they are supposed to be operating under.


Graph for The banks have got  us by the capital

The cap on bonuses in Europe to 100 per cent of salary, or twice that with explicit shareholder approval, is a bit of a joke really: there are even official ways around them, let alone Matt's umbrella hunt.

Meanwhile JP Morgan has now had to pay about $US20 billion in fines and settlements, including this month's $US2.6 billion for turning a blind eye to Bernie Madoff's Ponzi scheme, but there has been no hint of a suggestion that CEO Jamie Dimon should perhaps step down, or even consider his position.

It's not just JP Morgan: bankers have had to fork out billions of their shareholders' money in fines in the US with few repercussions on themselves, let alone the sack.

In fact, individual bankers have sailed out of the 2008 credit crisis's perfect storm pretty much intact, spinnakers up. Those, including your correspondent, who thought there would be wholesale falling on swords, reductions in pay, limits on their risky behaviour and a secular decline in overall finance sector profits and employment were living in a fantasy world. Hardly anything has happened.

And then this week global regulators let banks off the hook on their capital ratio, completing the banks' victory over the victims of the GFC.

The Bank for International Settlements has stepped back from requiring a big increase in the leverage ratio, which is the blunt ratio of capital to overall assets, designed to avoid gaming of the complicated system of risk weightings of assets that is also used. Any changes to leverage ratio have been put off to 2018 and it looks like the minimum will be just 3 per cent.

As a result the share prices of banks like UBS, Deutsche and BNP Paribas have surged this week, lifting the stock markets generally, because the banks will now not have to raise anything like the capital the markets had feared they would. Everybody's happy, except perhaps those who worry about another credit crisis.

In Washington, banks are still lobbying hard to water down the ‘Volcker Rule’, which is the part of the Dodd-Frank Act pushed by former Federal Reserve chairman Paul Volcker designed partly to reintroduce the restriction on commercial banks speculating in financial markets that was repealed with the Glass-Steagall Act in 1999.

That repeal contributed in large part to credit boom and bust of the following decade, but you wouldn't bet on the banks failing in their bid to block its return – even to the limited extent proposed in the Volcker Rule. It started as a total ban on proprietary trading, but has already been watered down with exceptions.

Time and again as regulators try to impose restrictions on the operations of banks and the bonuses of the bankers, they are threatened with a cut in lending which would harm the economy and the regulators blink. 

After all, the Federal Reserve has been handing the banks $US85 billion a month in cash in return for useless securities to try to get them to increase lending to get unemployment down and inflation up; it would be illogical to restrict their lending with the other hand.

The truth is that the global banks, as well as the large domestic ones, are not just too big to fail – they are too powerful to curb.

It's a capitalist world, and they've got the capital.

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