Bank Capital Rules: A Reminder of 2008 | Elliott Wave International

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Bank Capital Rules: A Reminder of 2008
"In 2008 there was a credit crisis. The next five years will bring on the credit crisis."

By Bob Stokes
Thu, 10 May 2012 17:00:00 ET

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Is our financial system stronger today than it was four years ago?

Most people might think so; mainstream news analysis rarely suggests otherwise.

But here's what the public remains mostly in the dark about: despite post-2008 financial reforms, many banks are still over-leveraged:

It has been four years since the global financial crisis first struck, and the system that helped cause the deepest economic slump since the 1930s is still broken... a critical component of a stronger financial system -- an internationally coordinated increase in bank capital -- is missing.

U.K. and European Union finance ministers fell out over this last week. And it's already clear that the new capital-adequacy rules...will be too weak.

The previous system...totally failed. It required too little capital and let banks invest in some risky securities, including sovereign debt, as though they were risk-free. This helped bring on the financial meltdown.

...Wafer-thin capital -- in other words, huge leverage -- was the main reason the crash propagated as it did.

Bloomberg, May 6

Bank capital requirements remain close to "wafer-thin." The bottom line is that banks do not have a cushion sufficient to withstand another economic earthquake. And the next seismic economic shift could be sooner than later:

Investment banks and hedge funds use collateral to get lines of credit so they can leverage their speculations. The sounder the firms are, the more leverage they can command. Extreme leverage (30x and higher) from investment institutions is one of the reasons that stocks are priced as high as they are today. As financial conditions deteriorate, creditors demand more collateral. Downgrades are inevitable once the cycle turns back down.

Elliott Wave Theorist, March 2012

Indeed, our own central bank is concerned about another economic downturn:

Federal Reserve officials are increasingly concerned about the coming "fiscal cliff," putting it on par with the European financial crisis and the housing market as among the biggest potential threats for the U.S. economy...At the heart of that debate is frustration within the central bank that Congress and the administration are relying too heavily on monetary policy to kick start the economy and keep the recovery going.

CNBC, May 10

What's more: the European Central Bank itself is "leveraged to the hilt." In another reminder of the financial crisis, a CNBC headline reads (5/10):

European Central Bank Leveraged Like Lehman...

2007-2008 was only the start of global economic deterioration. As the same issue of the Theorist quoted above says

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Tags: banks, central banks, conquer the crash, credit rating, debt crisis, debt downgrade, deflation, economic depression, Elliott wave, european central bank, European debt crisis, hedge funds, U.S. Federal Reserve (the Fed)

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