How Ironic: 360 Degrees

Reading this a.m. about a proposal by the FDIC that bank holding companies hold 5% capital against 100% of all assets (unclear if that includes off-balance sheet items and whether there would be any consideration of mark-to-market) and deposit taking subsidiaries would have hold 6%.

The irony is that the whole point of developing risk based capital was to get the regulators to recognize that a "B" risk is different from a "AAA" risk.  The success of that effort led some banks to load up on low risk based capital assets that did not deserve their rating.  Because the rating agencies did not think about correlation risk correctly in their ratings of sub-prime bonds, they and risk based capital charges (in the eyes of some) generated the housing bubble and the Great Recession.  That generated the need for TARP and the rescue of Fannie and Freddie and a political imperative that Too Big Too Fail be ended.

The industry goal of risk based capital was to allow banks to become very big without failing.  The irony is that they were successful in getting very big, but f*&#@ up the implementation of Risk Based Capital by forgetting the prudent judgment was also needed and now risk based capital is discredited by the politicians and the citizens to whom the regulators must answer.  And I must say, shareholders are not too impressed by the end result.

So, we have now traveled the full 360 degree circle from mandatory minimum capital to RBC back to mandatory minimum capital.  At least, there is no mandatory cap on bank size, so there is hope for banks to find a way to not fail and reward shareholders.