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Britain moves to rescue RBS, HBOS.

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Joe Nocera joins Simon Johnson and other experts in saying that Fed Governor Daniel Tarullo's suggestion to raise capital requirements of U.S. banks to 14% makes sense. He quotes Anat Admati, a fiance professor at Stanford Business School, who says the only way to get rid of bailouts is to raise capital requiremets to an adequate level. The Wall Street Journal editorial on June 16, 2011, also supports the higher Tarullo capital requirements. Why is it that European banks and the Basel III accords provide a 7% capital reserve requirement phased in over many years- to as far out as 2019- if this is the case? The European banks are in much worse shape than the U.S. banks especially with Irish, Greek and other debt on their books and Basel III is designed to accomodate this. The governor of the Bank of England, Mervyn King, is also advocating higher capital reserve requirements than Basel III, including the flexibility for countries like Britain and Sweden to set their own capital reserve requirements based on their own situation and the need to protect taxpayers. The U.S. stands to gain a lot from setting its own standards if France and Germany and other European countries decide to user lower standards through Basel III....

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The U.S. financial sector is facing a future in which there will be lower revenues and a smaller number of jobs. A low interest rate environment does not help the banks. According to analysts surveyed by Bloomberg, net revenue for the six largest U.S. banks will decline by 3.7% in the second quarter of 2011. As a result financial stocks in the U.S. have trailed the broader market in the last 9 of 11 months. The ratio of the price of the S&P 500 financials index to the S&P 500 stock index is less than 0.16. The only time it was less than 0.16 in the last two decades is during the January-April 2009 period when banks were facing a major financial crisis. Bank of America's stock was at a two year low on June 6. Tighter regulation, state and federal investigations, and higher capital requirements from the Fed, will affect revenues and jobs.

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Holman Jenkins of the WSJ talks to CEO Blankfein of Goldman Sachs. Goldman is about to issue large bonuses to employees which Blankfein says he would do to keep his people happy even if it means upsetting the public, especially as Goldman is seen as abeneficiary in the government's bailout of AIG and a beneficiary through its close contacts in the administration.

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Efforts by Spain's government of prime minister Rajoy to come up with credible estimates about the actual needs for recapitalization of troubled parts of the banking system, and which banks should be closed. Report out in June by consulting firms Oliver Wyman and Roland Berger relies on information from the Bank of Spain. A detailed audit examining the books of the 14 largest banks in Spain will be completed by audit firms by the end of July 2012. Considerable criticism in banking circles in Barcelona and London about the procrastination by Spanish banking authorites in coming up with credible estimates of the actual bad loans and losses in the Spanish banking system. This would improve confidence in financial markets that the problems can be controlled and a way forward planned.

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The savings rate in the US has averaged 5.7% of disposable income in 2010, compared to 3.1% in the prior ten years according to the Commerce Dept. Even with tiny returns of 0.80 percent on average in October 2010, deposits at banks increased by $1 trillion to 7.74 trillion since October 2007, says Market Rate Insight. Information from the Fed shows borrowing by banks decreased by 17% since July 2009, while deposits increased by 9%. Banks are doing more of their funding with core deposits.

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Spain accepts assistance from the European Financial Stability Fund with the EFSF committing $125 billion to the Spanish government for a fund specifically intended to recapitalize the banks. Some oversight will be provided by the IMF for Spain's banking system, but this is not a bailout in the sense of IMF conditionality or the EU imposing oversight of Spain's management of its finances and the economy. Instead a compromise was reached where only oversight over its banking system was offered in exchange for the loan. Spain has already committed to improving competitiveness in the economy, and reducing the fiscal deficit with some flexibility due to rising unemployment which has reached 25%. The problems in Spain's banking sector are focussed on the cajas savings banks which financed the housing bubble and not on all banks, with banks such as Europe's second largest bank Banco Santander which have intenational operations being in much better shape. The U.S. and the UK experienced a housing bubble at the same time as Spain, but the governments of both countries moved early on to recapitalize the banking system in 2008-2009. This move is significant because it helps stabilize the gobal economy by fixing the main problem facing Spain of recapitalizing its banks, this being the largest problem in the eurozone....

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Turkey faces a economic crisis driven by high inflation and sharp decline of over 40% in the lira. The ENAgrup research group estimates inflation at 58% in November over the prior year, higher than the 22% official figures. ENAGrup estimates 50% inflation in October and 45% inflation in September. The steep inflation say experts is a result of an unconventional policy of president Erdogan to lower interest rates by 2%. In contrast the Russian central bank increased interest rates by about 3%, Brazil's central bank by about 6%. This report looks at two weak links for the lira and inflation prospects with graphs.  One is that the debt of Turkish banks is heavily in foreign currency debt with $82 billion due in next 12 months. A weak lira makes it harder to pay off these debts. Turkey's central bank net foreign assets taking into account all foreign currency liabilities is a negative $48 billion in Oct 2021, according to graphs shown in WSJ. The second is that Turkey's people are fleeing the lira. Nearly 60% of banking deposits are now in foreign currencies, according to data from Capital Economics. A sudden surge in requests to withdraw dollars by Turkish residents could make banks to draw down their foreign currency reserves. The government hopes that increase in exports could help Turkey in the crisis yet the situation today as shown by WSJ suggests a continuation of the current crisis of spiraling inflation and large drops in the lira's value. ...

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A detailed account of the developments that unfolded for Bankia bank during and after the initial public offering of its shares, after it was put together from seven failing cajas savings banks with bad real estate loans made during the housing bubble. The procrastination and small steps taken to paper over the problems by the Spanish government and regulators during the last year of the Zapatero administration and into the first year of the Rajoy administration.

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Banks in Britain will be charged a 50% tax on 2009 bonuses of more than 25,000 pounds or $40,800. It will be imposed directly on the bonus pool at banks and will be paid by the bank. It takes place effective immediately and affects 2009 profits. The public in Britain is sympathetic to such a move and it comes in the midst of concerns about the British deficits similar in proportion to that of Greece, and of the Dubai debt crisis. Andrew Hilton, who runs CSFI, a research center focussed on financial issues put it aptly: "I think banking has become a truly parasitical business. Bankers these days borrow money at 30 basis points and lend it to te governmet at 300 basis points and then they go play golf."

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Litigation expenses and settlements for JP Morgan Chase at $17.7 billion for 2008-2012 now exceed the $16.1 billion for Bank of America, according to FBR Capital Markets. JP Morgan Chase plans to spend an additional $4 billion and commit 5000 new personnel to help it clean up the bank's risk and regulatory compliance problems. Of the $4 billon $2.5 billion go into litigation reserves, and $1.5 billion for a 30% increase in risk control staffing and other related expenses. As part of the changes CEO Dimon has put the most senior executives in charge of separate parts of regulatory problems. These executives cannot be overruled by business heads. In another change still to be made at other banks the top compliance officer reports to the chief operating officer of the bank not the general counsel. This change was made at the request of regulators who now meet about 50 times per month with compliance executives. The total control staff for compliance and risk are now at 15,000 in 2013, up from 8000 in 2012. At a 2 day business retreat at Martha's Vineyard compliance and control officers were invited for briefings and came away with equal authority as business chiefs. JP Morgan has also provided 750,000 hours of training on control and regulatory issues to its staff using McKinsey, Ernst Young and other firms. CEO Dimon sees the effort as making the bank stronger than ever and this has become a top priority for him, reflecting a change in his views from the period when the London Whale crisis first emerged. It also shows a leadership trait of Dimon as a learner who puts his full weight behind an effort after gaining new insights into hidden problems....