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U.S. Fed governor, Daniel Tarullo, said in a recent speech that U.S. financial institutions could be required to meet stronger capital requirements than the Basel international standards. The Fed is considering requiring the riskiest financial institutions to put aside 8.4% to 14% of capital. The Basel standards require institutions to gradually increase the capital cushions to 7% by 2019 from about 2% at this time. Less risky institutions would would have a smaller increase over the Basel standards- about 20% compared to the 100% increase over Basel for the riskiest institutions. Speaking at the Peterson Institute for International Economics, Tarullo said- "The regulatory structure ...should discourage systemically consequential growth or mergers unless the benefits to society are clearly significant." Tarullo said no one wants to see another TARP. Banks would have to build up their capital reserves using common equity and not other forms of less reliable capital such as contingent capital, where banks convert debt instruments into equity in an emergency. Tarullo emphasized the need for the U.S. to move beyond the Basel requirements, known as Basel III, because they are narrowly designed for individual institutions and do not adequately address the systemic risk. When there is a high degree of risk correlation among many actors in fast moving markets additional risks are created which require stronger capital standards. Tarullo said systemically important institutions have "no incentive to carry enough capital to reduce the chances of such systemic losses."...

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The chairman of the high level group on Financial Supervision for the EU says central banks neglected their roles as guardians of financial stability. He is proposing asystemic-risks council with central bankers from all over Europe as members , and with the clear intent of overseeing financial stability. Jacques Larsiere's plan is part of the overhaul of the regulatory framework for the EU. It has been endorsed by the European Commission.

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The administration hopes to seize the initiative on the regulatory framework agenda before the G20 meeting on April 2, 2009. Broad outlines of the approach will be laid out. One of them is to give the Fed the authority to oversee the regulatory framework and oversee systemic risk. It includes stronger capital requirements for banks especially in good times, give regulators power to take over financial firms that are failing. Also included will be consumer protections, and strict enforecement of consumer protection laws opn credit cards and mortgages, and giving the government comprehensive authority over all financial products marketed to consumers.

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Jorg Asmussen, senior member of the executive board of the ECB from Germany says in a speech in Hamburg; "The markets are pricing in a disintegration of the eurozone. Such systemic doubt is dramatic- and for the European Central Bank, unacceptable." He supports buying of bonds of member countries by the ECB. Both Asmussen and Jens Weidmann were economics students of former Bundesbank head, Axel Weber at the University of Bonn. Asmussen who is from the SPD party, was deputy finance minister and then nominated to the executive board of the ECB. Jens Wieidmann was an advisor to German chancellor Angela Merkel and was nominated to head the Bundesbank. Weidmann has continued the Bundesbank position opposing buying of sovereign bonds by the ECB, increasing the split in German opinion on this issue.

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Anat Admati, is a professor of finance and economics at Stanford University School of Business. He says banks should depend on generating 30% of their assets from equity, something the banking industry of today in the U.S. and Europe considers heretical. More of the bank's assets should come from equity and much less from borrowed funds. Outside of banking healthy corporations in the U.S. carry debt at about 70% of assets and there is no reason banks should not do the same. In 2013 says Admati, the situation is not much different from that after the 2008 global financial crisis- large banks carry liabilities and debt at over 90% of their assets. The $2.2 trillion in debt at JP Morgan Chase bank is about 91% of assets of $2.4 trillion. Basel III regulations allow banks to borrow upto 95% of assets, and proposed banking regulations in the U.S. put this at 95%, with the way this is measured still being debated. At such high levels of debt the margin of error is small, and systemic risk which is high in a globally interconnected banking system means the whole banking system can freeze from one large bank going into failure such as Lehman Brothers. This happened in 2008 and the margin of error is still small, which is why global banking is such a high wire act with the U.S. Federal Reserve, the ECB and other central banks issuing regular warnings and regulators faced with the task of keeping the banking system in check through vigilance and investigations of banks violating laws. How much difference has Dodd-Frank legislation in the U.S. made after 2008? Jason from Atlanta says in response to Admati's article, that the Glass-Steagall Act of 1933 was 37 pages and the banking system did not freeze up in the way it did in 2008 for the rest of the twentieth century until its repeal. The 879 page Dodd-Frank legislation of 2011 is overly voluminous and still leaves 243 rules to be written by regulators in consultation with the financial industry. Banks are larger now than they were in 2008 and have an outsized influence in shaping the rules, leaving the U.S. Federal Reserve's supervisory committee and Fed Governor Daniel Tarullo with the job of somehow keeping banks out of trouble. JP Morgan Chase, Admati reminds readers, has $2.4 trillion in assets as of June 30, 2013, and debts of $2.2 trillion, with $1.2 trillon in deposits and $ 1 trillion in other debt owed to money market funds, other banks, bondholders and the like. ...

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On December 17 Kenneth Lewis CEO of Bank of America arranged a urgent meeting with Treasury's Paulson and the Fed's Bernanke to discuss unexpected losses in the billions at Merrill. Paulson and Bernanke persuaded Lewis not to scrap the deal and offered a $138 billion package not to scrap the deal. The deal then closed at $24 billion. Was it abad idea not to disclose the bad news immediately? It certainly proved to be the just that. In five trading days Bank of America's market capitalization dropped 45% wiping out a much bigger sum than the Merrill deal. Lewis says that the government was firm in its view that serious systemic harm would result if Bank of America did not close on the deal. Law suits from shareholders could result from this but says one legal expert a legal doctrine could emerge that in anational economic emergency companies are absolved from governance actions harmful to shareholders like nondisclosure of critical information. Which only shows how complicated situations can get once everythings spins out of control starting from the basic fact of bad opaque assets on the company's books, taking any form of rational action and behaviour with it with a million unpredictables....

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How will deflation in the USA affect jobs in China? Not just Roubini talks about a deep recession. Kenneth Rogoff, an economist who has argued with Stiglitz's view of things during other banking and financial crises in Asia in the nineties and has been an optimist about things compared to Roubini's serious concerns, is now talking about a lost decade. Early on a lot was said of and made of the housing crisis in Sweden, where with strong government intervention and decisive action to capitalize and take stakes in banks, things were back to normal in a few years. One thing that Sweden did not face was a global slowdown and global systemic effects of credit crises worldwide so it now looks like a different situation. Here you have a series of things happening at the same time, housing price collapse, foreclosures, higher unemployment, no savings and high debt for consumers and banks foreshadowing possible collapse in consumer spending, and declines in capital spending, tight or no credit for small and larger business, global slowdown including China and India slowing exports significantly for the developed countries of USA, Europe and Japan. Interest rates near zero in the USA and Japan and trillion dollars already committed in the USA for bailouts and assistance, even before the ful force of the economic downturn has hit and this is the beginning of the downturn. ...

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The Treasury and Fed's handling of the financial markets crisis on Tuesday, Wednesday, Thursday and Friday as it unfolded Sept 17, 18, 19 and 20, the worst since the 1930's. With the credit markets battered, the collapse of Lehman Brothers investment bank and the rescue of AIG right on the heels of the rescue of Fannie and Freddie the previous week, and all these moves barely improving the general loss of confidence and increasing fragility of the financial markets worldwide. Steps like the ban on short selling by the SEC to stem two 400 point declines in the last few days, and the Fed setting aside $50 billion to shore up money market funds by making them whole where needed, and providing about $200 billion through the European Central Bank and the central banks of Japan, Britain, Canada and Switzerland, were tactical moves so Paulson and Bernanke had to address the real problem of removing the highly illiquid assets of risky mortgages from the financial markets. This would require working with Congress to put together the necessary legislation which is what Congress, Treasury, the Fed, and others will work on this weekend of September 21, 22, so that the legislation could be drawn up the following week and passes into law creaing some Federal agency that will buy up the illliquid mortgage assets owned by banks, investment banks, and other financial institutions before there is another series of collapses in the financial markets necessitating rescues by the Fed. Meantime Treasury has raised another $200 billion last week through sale of Treasurys and provided this money to the Fed to use as needed. The result of the most recent chaos in the financial markets has resulted finally in agreement among all parties about the need for committing taxpayer money in hundreds of billions of dollars to be used to buy up the risky illiquid mortgage assets at steep discounts to be resold later to bargain seeking companies so that the banking sector can repair their balance sheets and recover, as being much safer and less costly route than the cost of rescuing financial firms with systemic risk on an individual basis after a run on these firms or their imminent collapse. Which is why people like Laurence Meyer of Macroeconomic Advisors himself a former senior Fed official believe that this is the first serious effort to tackle the crisis by getting to the root cause of the problem and removing the illiquid mortgage assets and the Government an taxpayers spending the hundreds of billions of dollars but at the same time finally seriously tackling the crisis in a manner that will restore confidence to the markets and to the industrial economy of the USA. His comment, "the markets voted and they liked the proposal", as the Dow Jones went up 610 points at one point and ended up the day Thursday September 19 at 410 points gain for the day....

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Sheila Bair releases her new book in Sept 2012 on the financial crisis of 2008-2009 and the efforts to introduce financial reforms for a safer financial system: "Bull By the Horns: Fighting to Save Main Street from Wall Street and Wall Street from Itself." She is particularly critical of U.S. Treasury Secretary, and former head of the New York Federal Reserve, Timothy Geithner, as protecting the interests of Citigroup and Wall Street in his position as Treasury Secretary of the U.S. government. She describes in detail the situations in which Geithner tried to water down essential reforms to the financial system to make it safer, including the Volcker Rule. Of particular concern is the revolving door by which banking regulators or government officials join banks after service in the government which leads to weakening of regulatory and government oversight and systemic risks as in 2008-2009. Sheila Bair is widely respected for her efforts during the financial crisis from 2008 to 2011, when she headed the Federal Deposit Insurance Corporation, the FDIC. Her active involvement in defending reforms and setting up the system by which financially failing banks could be taken over and unwound without risks to the U.S. financial system are lasting contributions. She also succeeded as a manager by setting up an experienced and effective successor in Martin Gruenberg as head of the FDIC, to continue this work. A former Congresswoman, she describes herself as a Republican populist from Kansas. Her current role is as senior advisor to the Pew Charitable Trusts, which itself is a rare phenomenon today for a senior government official leaving government....

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Two realities are affecting exchanges. One is that trading commodities and derivatives is a $600 trillion business worldwide and is more profitable than trading in corporate shares. This shows in the value of ICE and NYSE in the stock market. In April 2011 ICE was valued at $1.5 billion less than NYSE, in Dec 2012 ICE was valued at $4 billion more that NYSE as it makes its bid to merge with NYSE. The other is that the Dodd-Frank financial system overhaul in the U.S. after the 2008 financial crisis has created a new model for derivatives trading providing advantages to regulated electronic exchanges and clearinghouses that handle derivatives trades with transparency. Jeffrey Sprecher, CEO of ICE, the IntercontinentalExchange, which handles derivatives trading through its clearinghouse operations, says: "For the past decade, our solutions made our markets increasingly electronic and increasingly clear. Today, financial reform is imposing that vision on many markets through a rule-making process." Bart Chilton, a member of the CFTC which regulates derivatives trading says Dodd-Frank legislation supports the business model of derivatives exchanges. This is especially true for Mr Sprecher and ICE. Sprecher has a good relationship with regulators with whom he talks directly, and is supportive of CFTC efforts to close loopholes as he is confident he can make money as long as the rules are clear. His confidence stems from his model which is technology based from day one, with its own clearinghouse and technology based transparency of the ICE data vault, information it shares with regulators. Sprecher stumbled upon this opportunity. He is an executive in the power industry. Working on developing power plants Sprecher found it was difficult for power firms to hedge investments in energy with financial contracts because there was no well organized, clear and transparent market for such contracts. This he set out to do by buying a little know exchange in Atlanta for buying and selling electricity, later getting the the backing of BP, and investment banks such as Goldman Sachs and Morgan Stanley, to form ICE in 2000. Banks liked the idea of a having an organized clear place to buy and sell derivatives in oil and other commodities, and having an alternative to the Chicago Mercantile Exchange in futures trading. Swaps trading under Dodd Frank supervision is converting to old style futures contracts where there is less competition for ICE's futures trading creating new opportunity. ICE setup its own clearinghouse, and acquired the Clearing Corporation, which was the base for a derivative called credit-default swap. To make derivatives trading transparent and reduce systemic risk Dodd-Frank legislation required exchanges to provide information to data warehouses which would then share the information with regulators. ICE setup its own data warehouse to do this called ICE Trade Vault. Dood-Frank rules envisioned the formation of clearinghouses and exchange such a ICE to provide a clear process, transparency and reduce systemic risk in derivatives trading. ICE under Sprecher by making this vision its own and using technology has created new opportunity. ...

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Failure of U.S. regulatory agencies to implement an important provision of the Dodd-Frank legislation- instructing regulators to find all references to ratings agencies in their rules, and then replace them with better standards for judging credit risk. Treasury's Office of the Comptroller of the Currency, is one of the agencies trying to gut this reform, says this Wall Steet Journal editorial. The S.E.C. voted unanimously in March and April to propose rules eliminating credit agencies in their regulations on money funds and stock brokerages. As the comment periods have ended, the Journal calls for the rules to be immediately made final. Officials from FDIC and OCC are dragging their feet on this. One problem they face is their assumption that the Dodd-Frank law requires them to come up with the perfect rule for measuring credit risk. This is not what the change is intended to do. It is enough says the Journal to return the responsibility for the right metrics and the hard work of analyzing a security back to where it belongs- to people who manage these assets and institutional managers. Even if they made some mistakes it would be far less than the systemic risk posed by having all major institutions making the same mistake at the same time and the entire system following flawed ratings by the big three credit ratings agencies. This happened in the 2008 mortgage securities financial crisis. S&P has stated that it does not support the old system. And new alternatives are appearing for ratings- CreditSights, Rapid Ratings, Kroll Bond Ratings which got S.E.C.' support, and other alternatives still to come....

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The Vickers commission, has been appointed by the Cameron government to look into the British banking system and the largest banks. Ringfencing to protect retail deposits from the bank's other investment activities has been suggested. The focus is on increasing capital requirements as critical to protecting British taxpayers and the banking system. This means going beyond the Basel 3 requirements to build an extra safety buffer for the types of situations the British government was faced with in HBOS, where losses were even greater than average. Determining this should be coordinated with EU and Basel regulators.

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New risks are emerging in the shadow banking system as regulators work to make the banks safer. Banks as deposit backed financial firms are different from mutual funds, private equity and other firms that are doing more of the financing for business and home loans in the U.S. financial system. As banks deleverage responding to tighter regulation by increasing capital buffers and reducing assets, it makes the financial system safer, yet creates new risks in the shadow banking system not subject to regulation and not supported by bank deposits the way banks are. A IMF report put out in April 2015 underlines these new risks in the U.S. and European financial system. Mutual funds and exchange-traded funds now rival banks in providing financing to companies with high debt. Total bond holdings worldwide in 2014 were $9.6 trillion, increasing 25% over 2008, and the mutual funds leveraged loans increased 60% to $151 billion in the U.S., 223% in the eurozone to $126 billion, according to the IMF. The IMF points out that these mutual funds and exchange traded funds favor emerging market and corporate junk bonds, and operate in a way where they mimic each others in their investments, creating contagion. With hard to sell securities and the rapid decline in these types of funds in a panic, the effect could be to create contagion across the funds. In the mortgage lending field a similiar process of deleveraging is happening. U.S. banks share of federally guaranteed mortgages from big banks down from 61% in late 2012 to 33% in 2015, other smaller finance companies taking up 51% increasing from 24%, according to an American Enterprise Institute report. Paul Tucker, former deputy governor of the Bank of England, points out the dangers. He says policy makers and regulators are playing catchup with firms in the financial services industry who are constantly looking for gaps in the rules, a game that policymakers and regulators are likely to lose at some point....

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To get the agreement of the 27 countries engaged in the talks to set new banking rules, the new Basel III banking rules are being phased in over a protracted period. Some changes go into effect in 2013, but others will be put into effect by 2019. The focus on the new rules is how much capital, or "common equity" banks will be required to hold as a cushion to absorb losses in a crisis like that of 2008. Large banks will be required to hold 7% of their assets in common equity. By 2015, banks will have to begin building a 2.5% buffer of capital, which must be in place fully by 2019. No action was taken on issues such as requirements for banks to have access to ample liquidity, what systemically important banks should hold in capital, and establishing a counter cyclical capital buffer.

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Th Basel Committee on Banking Supervision set strict financial guidelines for capital and liquidity that banks have to hold, but failed to implement early compliance. Banks get 8 years to comply for most of the banks, and 13 years for some of the banks. Increasing capital requirements by triple the current levels in the form of current equity, as required by the new Basel rules, gives banks a larger buffer in a situation that some of their assets lose value in a crisis such as the one in 2008. The US argued for stronger requirements and early implementation. Germany held back the implementation timetable mainly because its regional banks are saddled with bad loans; which might require $100 billon capital infusion by the German government, if early compliance was set in the new rules. The result is that the Basel rules have not grasped the opportunity to act quickly to strengthen the banking system, according to Prof. Jeremy Stein of Harvard University, a former advisor to the U.S. Treasury Department. In Stein's view the timetable is so far out, that another crisis will probably take place before the implementation. In the event, regulators from the U.S., Germany, and other countries let fears of tightened lending by banks prevail to an extent where the new rules timetable is stretched way out for 8-13 years....

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A report by the Bank of England suggests a more prudent approach for British banks by setting aside more reserves for losses on bad loans from past decisions. Mervyn King, Governor of the Bank of England, says the Financial Services Authority should talk to banks and tell them to look "more prudently" at their credit levels. King says current capital ratios do not provide a correct picture of the health of the banks. The report says capital ratios of Barclay's, RBS, Lloyds, and HSBC could be overstated by between 5 billion or 8 billion and 35 billion pounds. The goal King says is to restore confidence in Britain's banking system with a prudent approach.

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Mervyn King, the governor of the Bank of England, is coming under increasing criticism for supporting the Conservative-Liberal coalition government's austerity plan, and for lack of efforts to fight inflationary pressures. On a major issue on which King has taken a clear stand- that the largest British banks should increase capital levels exceeding the international standards- not much has happened. Consumer prices in Britain were up at a 3.7% annual rate in December, and the government's austerity policies will also cause pain. In a recent speech King said that the Bank of England had limited ability to fight the higher unemployment and increased inflation. It was an admission of the limits of central bankers in the current situation. King said "a squeeze in living standards is the inevitable price to pay for the financial crisis and the subsequent rebalancing of the UK and world economies.

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Over the weekend June 25-26, 2011, the Basel Committee made the decision to raise bank capital reserve requirements from 7% to 9.5%. Wall Street Journal and analyst estimates show that Bank of America, Citigroup, and J.P. Morgan Chase will have to together raise $150 billon in additional capital. The rule gives the banks time till 2019 to reach the new goal. Banks that get even bigger could face an additional one percentage point increase to 10.5%. As of the end of the 1st quarter of 2011, J.P. Morgan had an estimated 7.3% ratio and would need $35 billion to meet the 9.5% capital reserve requirement. Bank of America would need $68 billion and Citigroup $48 billion to reach the 9.5% target.

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Hype and sales tactics by banks in sovereign bond issuance is coming under scrutiny by the International Capital Markets Association (ICMA). In one deal, a "covered bond" issued by Spain's Banco Santander SA in June 2011, with the collateral being Santander's loans to Spanish local and regional governments, this was clearly the case. The deal was managed by HSBC, Societe Generale, Commerzbank and Santander. One or more of these banks told investors they already had orders of 1.5 billion euros, which exceeded the original size of the 1 billion euro offering. After this deal found no buyers because of fears about Spain's debt situation, it became clear that the claims about orders were hype. The underwriting banks had to buy the bonds worth hundreds of millions of dollars.

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The Spanish government said it will inject 19 billion euros into Bankia SA.