Banks : Got to do More with Less Capital

SnapShot Summary

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. Bank to hold more capital.

. Got to do more with less.

. Is retail banking then going thru a transformation ?

. Is thus why HSBC cuts it's retail arm in US & Europe ?

. Is it better to be an investment funds ?

. Is this why bank shares are hit ?

. Bearish China Bank Shares !

. Global Growth to slow ?

. Not if the trillions flow to global infrastructure investments & projects

. And the emerging markets fill the void.

. Nevertheless, get ready for Wave 5 peak in US equities.

http://www.theprovince.com/business/recession+hello+slump/4990887/story.html?cid=megadrop_story

What makes that gloomy prognosis more likely is the prospect for continued muted growth in the broad measure of the money supply, M3. To understand this, we must understand the implications of the so-called Basel III capital-asset standards for banks, which are set by the Bank for International Settlements in Basel, Switzerland, of which Canada and the United States are among its 28 members.

Basel III, among other things, will require banks in member countries to hold more capital against their assets than under the prevailing Basel II regime. While the higher capital-asset ratios that are required by Basel III are intended to strengthen banks (and economies), these higher ratios destroy money. In consequence, higher bank capital-asset ratios contain an impulse -one of weakness, not strength.

To demonstrate this, we only have to rely on a tried and true accounting identity: Assets must equal liabilities. For a bank, its assets (cash, loans and securities) must equal its liabilities (capital, bonds and liabilities that the bank owes to its shareholders and customers). In most countries, the bulk of a bank's liabilities (roughly 90%) are deposits. Since deposits can be used to make payments, they are "money." Accordingly, most bank liabilities are money.

Under the Basel III regime, banks will have to increase their capital-asset ratios. They can do this by either boosting capital or shrinking assets. If banks shrink their assets, their deposit liabilities will decline. In consequence, money balances will be destroyed. So, paradoxically, the drive to deleverage banks and to shrink their balance sheets, in the name of making banks safer, destroys money balances. This, in turn, dents company liquidity and asset prices. It also reduces spending relative to where it would have been without higher capital-asset ratios.

The other way to increase a bank's capital-asset ratio is by raising new capital. This, too, destroys money. When an investor purchases newly issued bank equity, the investor exchanges funds from a bank deposit for new shares. This reduces deposit liabilities in the banking system and wipes out money.

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