Everyone's Freaking Out About This One Financial Regulation

Everyone working at a Wall Street bank is freaking out about one proposed financial regulation: capital requirements.

The regulation means that banks have to post more collateral against trades, for example, or loans to small business owners. Banks think the proposed ratio is too high and they’re fighting HARD to get it lower.

The rule no one on Wall Street wants: Basel III rules will set a capital surcharge that banks must post at 7%. In addition to that, U.S. regulators propose tacking on an extra 3% capital to debt margin requirement (possibly just 2% to 2.5%, if a rumour on CNBC is correct). 

Jamie Dimon spoke out against the regulations two weeks ago in front of Ben Bernanke. But after he received floods of criticism for his remarks (which seem to echo what many people on Wall Street think), he took a step back.

And now Barry Zubrow, Dimon’s underling and JPMorgan’s Chief Risk Officer, is leading the debate. Today he’s testifying in front on Congress with the aim to stop the regulation.

“The regulatory pendulum clearly has now begun to swing to a point that risks hobbling our financial system and our economic growth,” Zubrow said in testimony prepared for delivery tomorrow to the House Financial Services Committee.

That’s part one of the bankers’ argument against these requirements: that it hurts economic growth.

At least two people say that’s crap. A regional bank CEO says that requiring smaller banks to stick to the same capital requirements is the only thing that hurts economic growth — because smaller regional banks actually lend money out to entrepreneurs and small business owners. Put large banks and small banks in two separate categories, he says, and only require the big 6 banks to post the extra 3% capital, and economic growth will prosper just fine.

Simon Johnson, former IMF chief, says that bankers simply don’t want these regulations because they’re going to prevent the banks from risky but often profitable trades, so they’re claiming it will stymie lending when really, capital requirements have nothing to do with whom or how much you lend.

Here’s part two of the bankers’ argument against the requirements, also said by Zubrow: A capital surcharge on the largest global banks combined with higher U.S. margin requirements for certain trading accounts “currently risks doing more harm than good” … It also puts U.S. firms at a “distinct and unnecessary competitive disadvantage.”

Simon Johnson shot down that argument too.

One of the best arguments that bankers might have is in CNBC’s rumour. As soon as Steve Liesman on CNBC suggested that the Fed might only require a 2% to 2.5% margin, the market rebounded a bit.

And similarly, it was May when the market found out about some of these margin requirements — the same month commodities and pretty much everything else got slammed.

Ben Bernanke reportedly said that if the S&P is down a couple of hundred points, he might reconsider QE3, but of course QE3, if it were in the same form as QE2, which many now say was worthless, there would be backlash. So maybe lowering margin requirements is one way to bring back the market a bit without dressing it up.

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