The “lax” is clearly a tad inflammatory, but tweaks in Basel III rules to allow dubious quality items like mortgage servicing rights as Tier I capital speak volumes. In addition, the various noises from policy makers makes clear that they aren’t willing to make banks raise capital level by much due to fears of the impact of lower loan availability on economic growth (more equity behind lending means higher lending costs, since equity is more expensive than debt). And with that not-very-strong starting point, the banks have pushed for even weaker rules.
Should this come to pass, Credit Suisse, via a Wall Street Journal story, is already predicting the outcome: more bank mergers. This is would be yet another example of the costs of not taking a tough enough line with banks (the 2009 example being explicit and covert bailouts, without forcing changes in top management and boards at the struggling banks, was diverted to a significant degree to record bonuses, rather than its intended aim, building up capital levels). The latest antiicpated bad outcome, per the Journal (hat tip Richard Smith):
Interesting, therefore, that analysts at Credit Suisse, have just published a research report entitled “Opportunity Knocks,” which sees a “blue-sky” 78% potential upside from current share price levels based on higher returns, lower-than-expected cost of equity and benign macroeconomic scenarios.
If the blue-sky background does indeed pan out and profits rise as bad loans decline, bank share prices will improve to the extent that they will start to have the confidence to start looking at acquisitions that are more than just the opportunistic ones seen post-crisis.
This will especially be the case if, as expected, the new Basel III capital rules are pitched at such a level that many banks turn out to have excess capital. Most bankers have enough sense not to talk about this openly just now, but acquisitions will be one way of spending the money. One assumes that in this new banking environment, acquirers will have to convince regulators that the resulting solvency position is more than adequate. Given the ability of bankers to destroy value for their shareholders this would seem to be fundamental.
We doubt many readers are of the “benign macroeconomic scenario” school, but this is classic bad incentives at work. I haven’t seen any international studies, but US studies of bank efficiency have consistently found larger banks to be slightly MORE costly to operate as asset size rises, once a not very high threshold is reached. So the widely touted rationale of cost savings is bunk; each bank in a merger could have achieved the same cost level on its own.
So why do deals like this continue? Because banks CEO pay is positively correlated with bank size. Empire building is a very profitable exercise for bank executives. And the top echelon of the acquired bank is bought off via golden parachutes.
The result is more TBTF banks, the last thing we want from a policy standpoint. But it looks like fear of taking the banksters down a notch is going to lead to more of the same, which is ultimately more looting of taxpayers.