Little banks, big problems

Basel III is upon us.

Yes, it sounds like the name of a doomsday device commissioned by a hostile race of alien invaders hell-bent on destroying earth and all its real estate. But actually it is a set of global banking regulations that will require banks to increase their liquid reserves in order to cover unexpected losses.

While the Big Banks are not making much fuss (they have more reserves than they know what to do with), the little guys are quaking at the prospect of more limits placed on their already constricted cash flows.

Due to vast disparities in the economy of scale, the Big Banks stand to gain an increasingly unfair advantage if Basel III affects everyone equally. Community banks currently hold only 25% of the residential mortgage market share.

Should Basel III be implemented across the board, boutique residential mortgage originators (the few that are left) would lose even more ground to the banking behemoths.

Industry leaders and community banking advocates have led a small crusade against Basel III, which has caused banking regulators to announce that it is unlikely Basel III will be become effective on January 1, 2013. The little guys are hoping for a reprieve from what they consider overly strict capital requirements.

first tuesday insight

Whether or not small banks should follow the same rules as the big boys is really a moot point.

For the record, it stands to reason that regulations ought to be different for community banks. By their nature as a community bank they have more personalized and effective qualifying standards (no robo-signers here).

Community banks also pose less of an existential threat to the greater economy should a few of them topple. In other words, they are not too big to fail, so why should we treat them as such?

But the heart of the matter is the misguided approach to regulation that Basel III takes. Think about it: the big banks have over a trillion dollars in excess reserves on deposit at the Fed. Increasing reserve requirements at this point doesn’t make much sense with the economy languishing in a liquidity trap! Funds need to be lent, not reserved.

Cash needs to flow now more than ever.

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Going negative for growth

Regulators should not be focusing on girding against another financial storm. They ought to be implementing a plan to keep the financial services industry from getting so darn hot in the first place.

How can this be accomplished? A complete and unbridled reinstatement of Glass-Steagall for starters. Doing so would once again separate retail banks from investment banks, limiting the reason for huge losses in depositors’ money.

The resurrection of Glass-Steagall would eliminate the most likely cause of a future bank run — another financial crisis precipitated by profligate lender speculation with depositor monies.

Related article:

Big banker speaks some sense, public stunned

Should banks big and small be sufficiently capitalized in the event of a rainy day? Absolutely. But perhaps we ought to think about moving to warmer climes instead of buying a bigger umbrella.

re: “Small banks battle regulators on capital requirements” from the Washington Post