Washington & Wall Street: Basel III Bad for Housing, US Economy

Should JPMorgan Chairman and CEO Jamie Dimon be the next Fed Chairman?

Federal bankrRegulators just published the latest “draft” bank capital guidelines for US depository institutions, aka “Basel III.” You don’t need to know the details; just know that consumers who want to get a loan to buy a house are getting screwed while the bankers who caused the financial crisis are being only modestly inconvenienced.

“This framework requires banking organizations to hold more and higher quality capital, which acts as a financial cushion to absorb losses, while reducing the incentive for firms to take excessive risks,” Fed Chairman Ben Bernanke said last week. “With these revisions to our capital rules, banking organizations will be better able to withstand periods of financial stress, thus contributing to the overall health of the US economy.” Unfortunately, none of this is true. 

The second key point to understand is that the new Basel III capital regime only barely raises capital for the largest banks, even while creating new loopholes for banks to do even more stupid things in the future. Here are a couple of links for you to scan if you have a few hours to spare: Memo and FinalRule. You can be sure that virtually nobody in the financial media understands these 1,000-plus pages of complete nonsense.

The Fed states: “Nearly 95 percent of bank holding companies with more than $10 billion in total assets would meet the 7 percent common equity tier 1 threshold, with an aggregate short fall of approximately $2.5 billion…” But the more important point is that nothing in the Basel III proposal even mentions the key factor behind the sub-prime crisis–namely, securities fraud. The closest that any politician gets to this central issue is fretting about consumers who were victims of bad home foreclosures.

While nicely skirting the issue of financial fraud, the Basel III framework does further harm to US consumers and the economy, while allowing really egregious loopholes that will allow banks to commit new acts of fraud in the future. For example, the proposal will make it far more expensive for banks to make good loans to families looking to buy a home. The “risk weights” for home mortgages are increased.

But there is more. Chairman Bernanke and his colleagues at the Fed have decided in the great wisdom that one to four family mortgages are not good collateral. This means that when banks make commercial loans to other banks and mortgage companies to finance home lending, the Basel III framework will reduce the amount of credit available. This rule only adds to the difficulty many Americans face in buying a home. At the same time, however, big banks are encouraged to make high-risk second mortgages without any capital penalty if the lender already owns the first mortgage. This is only one of many ridiculous aspects of the new rule.    

In a statement earlier this year, Senator Richard Shelby predicted precisely the problems now shown by the Fed’s approval of Basel III. “Congress needs a detailed analysis of current and new capital rules to ensure that taxpayers are protected without unduly impeding bank lending or economic growth,” Shelby said. “Only a comprehensive examination of the impact on financial institutions large and small will meet this need.”

In another amazing change approved by the Fed, the risk-weight for FHA and VA loans that are explicitly guaranteed by the Treasury increases from zero percent to 20 percent, which is the same for mortgage bonds issued by Fannie Mae and Freddie Mac. This change represents a very European view of banking that is antithetical to American business practices. 

Likewise mortgage servicing assets were not given favorable treatment in the Basel III rule, again reflecting the European view of such activities. Europeans, you see, don’t believe that consumers should have easy access to credit and now the Fed is endorsing that view. How does this help consumers Chairman Bernanke?

Bottom line is that Basel III is a disaster for the US housing sector and for American consumers. It only strengthens my view that the US should withdraw from the Basel framework immediately. As JPMorgan Chase Chairman Jamie Dimon told the Financial Times last year:

I’m very close to thinking the United States shouldn’t be in Basel any more. I would not have agreed to rules that are blatantly anti-American,” Dimon told the FT. “Our regulators should go there and say: ‘If it’s not in the interests of the United States, we’re not doing it’.” 

Amen. Now you know why I think Jamie Dimon, with all of his many faults, should be the next Fed Chairman. He understands that Basel III is a European mechanism for imposing greater regulation on the American economy.