Bank's capital requirement would lead to recession--By Shan Saeed

Is the global economy heading for recession?. By Shan Saeed

A recent recommendation for banks to set aside more capital to shield them from financial shocks will only throw the world back into recession. Global regulators working under the auspices of the Group of Governors and Heads of Supervision (GHOS) have proposed requiring banks to set aside extra capital to serve as a cushion, depending on the banks' size and systemic importance. These measures would avoid systematic and reputable risk for banks to go down...

Big banks will need to have 9.5 percent or even 10.5 percent tier 1 common equity ratios, if the proposal is adopted. Forcing banks to hike capital requirements will put those banks in a position to lend less in these challenging times. Banks are not lending at the moment in advance economies. More lending is needed to speed up global recovery, especially after the damage that money-printing stimulus measures and misguided regulatory policies have done to banks still reeling from the global recession. The legislators and regulators never understood what caused the financial crisis.

They have never acknowledged their part in facilitating the events that led to the crisis. Now having failed miserably in meeting their responsibilities on the way in to the crisis, they are perpetuating their mistakes by over-reacting by swinging in every direction without regard to the consequences.

U.S. bank regulators have said European financial institutions do need to exercise more constraint when cushioning themselves from risk. The stress testing system in Europe was weak and Ireland's bank failed that test miserably. All banks in europe were cleared in 2009 that they can withstand the global crisis ...

Stress test were not stringent enough to check the real stomach of the banks ability to see through these hard financial crisis. Just as troubling is that European banks continue to effectively set their own capital requirements using internal risk estimates, unconstrained by any objective hard limits. Tough times are coming fast for the bank's going forward.


Disclaimer: This is just a research piece and not an investment advice. All financial transactions carry a RISK