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Basel for All; Helicopter Shortage; FHA's Predictable Debacle

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Capital Punishment: "Shocked" is what bankers were on Thursday by a decision to force even the smallest lenders to comply with elaborate Basel III bank-capital standards. That was the Wall Street Journal's take, anyway. Our own view is that among close followers of the banking world, the Federal Reserve's decision to apply international capital standards to all 7,300 U.S. banks was about as shocking as finding gambling going on in a casino. What's beyond dispute is that the Federal Reserve Board's unanimous approval of the capital standards set by the Basel Committee on Banking Supervision is a big deal; it proposes setting a minimum capital requirement for all banks of 7%. The Fed estimates the banking industry would face a capital shortfall of almost $60 billion if the proposed capital buffers of Basel III were in effect today, according to Bloomberg. That compares with a Basel committee survey's finding that the largest global banks would confront a $640 billion shortfall if forced to have a 7% core capital buffer last year. Regulators anticipate U.S. banks could meet their requirement — which will be fully in place by 2019 — by retaining earnings rather than raising capital. Fed Chairman Ben Bernanke on Thursday described the proposal as an "attractive package." Community bankers — who broadly believe Basel III is punishment for the misdeeds of far larger peers — used less glowing adjectives to describe the new capital requirements. The 7% capital requirement "feels like an awful lot of capital held by institutions that, by and large, have done an excellent job in this crisis of managing their problems and their capital," Cathleen Nash, chief executive Citizens Republic Bancorp, a midsized institution headquartered in Flint, Mich., told the Journal. In addition to the main capital rules, the Fed unveiled a proposal that would reduce the role of credit ratings in how banks measure risks in their assets. That proposal calls for swapping in risk classifications developed by the Organization for Economic Cooperation and Development to evaluate the debt issued by other countries. Another set of new rules proposes that banks hold more capital against over-the-counter derivatives and would apply only to the large, internationally active banks or those with significant trading activity. The Fed's action opens up a 90-day comment period during which banks of all sizes are likely to pressure regulators to make changes to the details.

Printing Problems: Europe's troubles show no signs of abating, and fears are rising that China could be the world economy's next problem child. Who ya gonna call? Your local central banker, of course. The problem is that Ben Bernanke and his buddies in the world's Kinko's of Currency aren't answering their phones — except the guys in Beijing, where, as noted below, some observers fear easy money is a greater danger than tight money. For his part, Bernanke cited significant risks to the U.S. economy during a Thursday Capitol Hill visit but stopped short of signaling that the Fed would take fresh action. "We have a number of different options" if the Fed decides to move, he told Congress's Joint Economic Committee. "At this point I really can't say anything is off the table." Or on it. Bernanke's no-action verbiage came despite his acknowledgment that "the situation in Europe poses significant risks to the U.S. financial system." In Spain, meanwhile, the good news is that the government managed to unload all the bonds it wanted to on Thursday. The bad news: it foisted most of them on its already troubled banks as part of a feedback loop that summons up images of Bernard Madoff at his worst. Or, as the New York Times bluntly put it, "If it sounds like the most vicious of circles, it is." Central bankers are sure to continue assuring the world they they'll act if and when it's necessary. In the meantime, they're directing their characteristically cryptic comments at dithering pols. "The ball is in the court of political players," European Central Bank President Mario Draghi said at a Thursday press conference. "It's not for the ECB to fill this vacuum." In discussing the so-called fiscal cliff looming at year's end, Bernanke gently warned Congress that "if you all go on vacation, it's [the passing of fiscal deadlines] still going to happen." New York Times

Federal Hocus Administration: Some crises sneak up on the world. Others arrive with all the subtlety and surprise of a freight train. The Federal Housing Administration's struggles with a growing glut of delinquent home mortgages is of the latter variety. In making this assertion, this writer can't help but think back to a story he edited two-plus year ago, in another lifetime. It was aptly titled "FHA: The Feds' Next Housing Debacle." "To prop up house prices, the government is becoming a lender of first resort. The results are predictable," the story began. (Let the record also reflect that FHA flaks were at the time touting David Stevens, the then-newly appointed, and since long-departed, FHA commissioner as "the new sheriff in town.") Now comes the denouement. The FHA is expected on Friday to announce a bulk sale of bum mortgages. It has more than 700,000 loans in default, amounting to more than 9% of the $1 trillion it insures, the Wall Street Journal reports.

Financial Times

Here's a really scary thought: What if six months from now the financial world's China problem is worse than its European problem? That sobering prospect is becoming increasingly possible, if not likely. "Zugzwang" — chess vernacular for a situation in which a player will worsen his situation with any move he makes — is how the Financial Times described the central government's move on Thursday to lower its benchmark lending rate for the first time since the height of the 2008 financial crisis. On the one hand, signs that the Chinese economy is slowing are multiplying. On the other are fears that a fresh round of stimulus and easy credit could reflate a property bubble and exacerbate the stark structural imbalances already present in the Chinese economy, the FT notes. "The weakness in bank lending we've seen recently is not because credit is too expensive but because the outlook is so negative and nobody wants to invest," said UBS economist Wang Tao.

Editor's Note

We had some technical difficulties with yesterday's Scan. The first email we sent to subscribers had no links, and the second version was still missing a link to the Times story about Fed officials' remarks on the economy. This must have seemed really weird after we made such a big deal out of how differently the Times played the story from the other papers. Here is the missing link.

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