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Bank of England Governor warns that British banks are undercapitalized in Nov. 2012 and need to add to reserves for additional losses.

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A delicate balancing act for the Federal Reserve, in not withdrawing support to the debt securitization markets in a manner that throws the economy off balance, and leads to the collapse of credit markets still again. Lee Sachs, an advisor to Timothy Geithner, Treasury secretary, says that its important to do it incrementally, where and when you think you can, and not sooner. The debt securitization markets act as a shadow banking system, they finance mortgages for homes, corporate loans, student loans, credit card debt. Before the debt crisis in 2008, banks made loans for mortgages, and then sold these loans packaged into securities in the debt securtization markets. 60% of American credit has in recent years come from this process of debt securitization. This is how the markets look at this time in September 2009. 1. A thriving private market in securities packaged out of home mortgages, collapsed from $744 billion in 2005 at the peak, to $8 billion during first half 2009. THe Fed is almost the only buyer of mortgage backed securities, with $905 billion of these government guaranteed securities purchased through mid September, 80-85% of the market. 2. The market for bonds backed by consumer debt - credit card debt, auto loans and student loans - has recovered to before the crisis. But this is only because of the government's Term Asset Backed Securities Loan Facility or TALF, which provides attractive government financing to buyers. Hyun Song Shin, a Princeton University economist, who is an expert in this area, says the big question is what happens without TALF, can the market stand on its own two feet or is it permanently hobbled. 3. The market for securities in commercial real estate loans has not seen any securties issued in two years. Overall says Robert Shiller, a Yale University economist, the security markets are dead, we are stuck in a situation where no one knows what will happen when the government gets out of these markets. The Fed will continue to support the mortgage markets till it goes from the $905 billion now to $1.25 trillion. At that point it will have to make some tough decisions, and banks are not lending, making it tougher for business. On top of this banks liquidity requirements are being increased after the G20 agreement, and Britain's FSA has already taken the initiative on this. And a further $50 billion in corporate real estate securities are to be refinanced in 2010, says CALPERS, Arnold Phillips. If there is no mechanism to address support here, these properties will default, leading to bank losses and even tighter credit. ...

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The U.S. Federal Reserve's actions in 2013 to counter the growing size and complexity of large banks. JP Morgan Chase and Wells Fargo assets have grown by 75% and 275% betwen 4th quarter of 2006 and 4th quarter 2012.

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Fed Governor Daniel Rarullo emphasizes the need for transparency and release to the public of stress test information. The goal he says is to release "this kind of standardized comparable information on a regular basis so that it's not a momentous event."

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Sheila Bair, former head of the FDIC, says householders, business leaders, politicians and government leaders are all prone to looking at the short term, and refuse to make the short term sacrifices necessary to put the economy on a trajectory of long term growth. There is also a sense of short sightedness and resistance to any regulatory steps that would actually create a better framework for the financial industry for longer term growth. The financial industry opposes increases in capital requirements for reserves that would lead to a healthier balance sheet for the industry, and opposes any efforts to create amore stable financial system for the country that might sacrifice short term profits. She points to IBG-YBG sense that prevailed in the industry, I be gone- you be gone, leading to the mortgage crisis. The industry tolerated faulty ratings, faulty packaging of securities, and showed complete lack of attention to the long term consequences of such behaviour and excessive leveraging, as long as the short term profits could be made. To a large degree the situation remains the same today, says Bair. Bair and Feldstein were among the first to suggest the Obama administration tackle the huge number of bad mortgages, that were leading to a wave of foreclosures. Only if this problem was tackled head on could this be put behind and the economy be put on a path to steady growth. As it stands today the Obama administration has not tackled the problem, the financial industry still has bad mortgage debt on its books, foreclosures continue, housing prices face further declines, and this will hold back an economic recovery. She refers to the "rationalization" of the last crisis by leaders in the financial industry through the assertion that nobody saw the crisis coming, when she says some of us did see it coming, and a "rationalization" by the same leaders in saying they did nothing wrong. Bair says that the continuation of business practices that led to the financial crisis of 2008 create risks for a new crisis. And some people in government continue to support these same practices while claiming popular support. The President's focus every two years is on getting re-elected and raising funds for re-election, business is focussed on the short term, and this creates a pervasive sense of the short-term throughout out the system and society. ...

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The loan-to-deposit ratios on average for European banks of over 110% are much higher than the average in the U.S. of about 78%, according to analysts. The loan-to-deposit ratios for Spanish and Italian banks are much higher, with 160% for Bankia. If Spain leaves the eurozone and places a moratorium on loan payments the Greek loans on the books of France's banks in Greece would be in default, especially Credit Agricole. The French banks would suffer an estimated loss of 20 billion euros, and German banks 4.5 billion euros. German banks have been more aggressive in reducing their loan protfolios at risk than French banks during 2010-2012, hence their smaller exposure.

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Bank of England governor Mervyn King's speech at the Economc Club of New York in Dec. 2012. About incoming governor Mark Carney, King says "I think he'll do a great job and they won't miss me at all." He says one way or another the U.S. will find a way to avoid the fiscal cliff. He sees a tension between short and long term policy goals such as recapitalizing banks and having governments reduce their debt.

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Berkshire Hathaway's deal in Nov. 2012 to pay $780 million for claiming the future cash flows of life insurance portfolio of Caixabank in Spain. Caixabank will claim a pretax profit of $680 million which it will use to increase reserves.

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Jon Hilsenrath of WSJ provides an illuminating account of how Daniel Tarullo as head of the Large Institution Supervision Coordination Committee has changed the way bank supervision and rules are set for U.S. banks since the days of the 2008 financial crisis. Tarullo started the effort under Ben Bernanke and continues this in 2014-2015 under Fed chairwoman Janet Yellen. The New York Fed is seen as ineffective in bank supervision and the supervisory role is now entirely performed under the leadership of Tarullo, assisted by Kenneth Gibson and Timothy Clark. The trio are some of the great unsung heroes of the effort to put the U.S. financial system and the economy on a safer footing.

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Gikas Hardouvelis was finance minister during a crucial period of impementation of the 2012 bailout program for Greece from June 2013 to Jan. 2015. Here he outlines the mistakes he sees made by the IMF in not agreeing to the 7.2 billion payment to Greece in 2014, 4% of Greece GDP, with one third of that not a loan. At the fifth review of the 2012 bailout the EU commissioner for economic affiars, Pierre Muscovici , said Greece had completed its requirements and the 7.2 billion euro funding should be released. Yet he says the IMF to preserve leverage over a future Syriza administration in the 2015 elections decided to hold back. This made it harder for the Samaras administration to tell voters that it had completed the program a year earlier, and the lack of the funds hurt the Samaras administration as it erased signs of growth that had appeared in early 2014. Following this error he points to 4 mistakes made by the Syriza Tsipras government. The first was that it was bitterly opposed to the lenders (IMF, EU and ECB) and failed to focus on the economy. Hardouvelis points out that the maturity of the debt of 16.5 years and low interest rates meant that it was not the immediate issue facing Greece, and he calls it very manageable. This was not to say that it was important but with creditors worried about moral hazard, other issues could be taken up first. Another mistake was to allow a loss of liquidity to the private sector so that prospects of growth were erased. The new finance minister acted as if the $7.2 billion infusion was not important and let payments be delayed. Tsipras and Varoufakis let the uncertainty increase in the private sector, and let the economy decline all the way to the closing of the banks. How costly was this is evident from the IMF's own paper in Juy 2015 and the 3 page update of July 14, 2015, on the Greek debt, showing it cost Greece a total of 60 billion euros in additional financing needed and an additional 25 billion euros for the shock from the closing of the banking system. That 3 page IMF paper shows that within the space of one year a shocking amount of damage was done by Syriza left government- it says Greece went from being on track for reaching Debt to GDP of 105% by 2022 under the Samaras-Hardouvelis administration in July 2014, to 142% by June 2015, and with the closing of the banking system to 170% by July 2015. Some of this would have come from the IMF's own withholding of the 7.2 billion euro payment to the Samaras government. ...

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The high cost of fines is likely to affect recapitalization of UK banks. Fines for Libor-rigging and compensations for customers on Payment Protection Insurance may cost the UK banking industry about 20 billion pounds, says Nixon. Other fines such as the $1.9 billion fine for money laundering activities of HSBC have to be added to this. This means less money for meeting stronger capital requirements and for lending to business and households. Higher compliance costs will mean higher costs in future years. HSBC estimates of the anti money laundering systems are about $990 million a year. The Bank of England has raised concerns about the need for additional capital to safeguard British banks.

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The questions about LIBOR rate manipulation were first raised in front page articles in the Wall Street Journal in spring 2008. In 2013 Deutsche Bank's U.S. financial systems were strongly criticized by the U.S. Federal Reserve. In April 2015 Deutsche Bank made a $2.5 billion legal settlement with the U.S. and British regulators for LIBOR rate rigging and admitted wrongdoing. It took BaFin the German regulator a long time to flag these irregularities in a strong manner, in its letter to Deutsche Bank. The comments in the Senior Management Review section of its report for the first time expressed in this level of detail the problems at Deutsche Bank, including problems with 11 current or former executives of Deutsche Bank. The letter and report were sent to the bank's management board May 11, 2015. A month later co-CEO's Anshu Jain and Jurgen Fritschen resigned. Ba Fin's top supervisor of large banks, Frauke Menke sent the letter. By the time BaFin acted many other regulators had already flagged the problems at the bank, and the media including the WSJ had already covered the problems in great detail. Between the first report in the WSJ on Libor rate irregularities and the May 11, 2015 report was a period of 7 years. ...

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Spain's central bank says the Cajas savings banks have 217 billion euros in exposure to real estate and construction companies. Of this 100 billon euros is "potentially problematic." The Cajas have provisions for 38% of this. The government approved rules for minimum capital requirements. The capital ratios are set at 8% for all banks and higher for the Cajas. It said all banks will need to raise 20 billion euros by a September deadline. Barclays estimates this at 46 billion euros, twice the government estimate. The government will extend the deadline on a case by case basis, so that banks have until December 2011 to close sales of stakes to private investors.The government will then take stakes in the banks by September through the Fund for Orderly Bank Restructuring or FROB. After a 3 billon euro bond issuance in January 2011, the FROB has 4.5 billion euros on hand and a 3 billion euro credit line.