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What Weill Missed Over the Past 3 Years

What Weill Missed Over the Past 3 Years

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Tony Fratto elaborates on changes since the financial crisis in bank safety and soundness that undercut Weill's arguments for a return to Glass-Steagall.
Tony Fratto elaborates on changes since the financial crisis in bank safety and soundness that undercut Weill's arguments for a return to Glass-Steagall.

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Categories:Types, Research
Published by: Hamilton Place Strategies on Aug 04, 2013
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HPSinsight.com
80515thSt.NW,Suite700
 
Washington,DC20005
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Insight
 July 26, 2012
HPSInsight
What Weill Missed Over the Past Three Years
ByTonyFratto
  ,
(202)822-1205,tfratto@hamiltonps.com
Yesterday,IaddressedthepoliticalnatureofSandyWeill’sargumentandwhyhisconclusionsarewrong.Inadditiontohispoliticalargument,Weillalsotriedtomakeasystemicsafetyandsoundnessargument.LostinWeill’spoliticalandpublicrelationsjustificationforareturntoGlass-Steagallisthefactthatthesystemisfarsaferthantheoneheseemstobeconcernedabout.I’mnofanoftheDodd-Frankact–Iwouldhavepreferredafarlessconfusingandprescriptivereformofourfinancialsystem.ThelawmakesitmoredifficultforU.S.firmstoservecustomersandcompeteglobally.However,there’snoquestionthatDodd-Frank,howeverflawed,iscontributingtoamoresafeandsoundbankingsystem.Weillcitedtheneedformorecapitalandlessleverage.Generally,everyoneagrees,andinfact,sincetheendofthecrisistheentirefinancialsectorhasincreasedcapitalandliquiditylevels.AshighlightedintheHamiltonFinancialIndex,theTier1CommonCapitalRisk-BasedRatioforcommercialbanksisatanall-timehighandhasrisen38percentsincethecrisis(Exhibit1).
Exhibit
!
1
!
TIER 1 COMMON CAPITAL LEVELS HIT ANOTHERALL-TIME HIGH IN THE FIRST QUARTER OF 2012
!
Source: FDIC, SNL Financial
!
1.0
!
0.8
!
0.6
!
0.4
!
2
!
14
!
12
!
10
!
i   e C  omm on C  a  pi   t   a l    (   $  )  
1.4
!
0
!
   T   i  e  r   1   C  o  m  m  o  n   R   i  s   k -   B  a  s  e   d   R  a   t   i  o   (   %   )
8
!
6
!
1.2
!
   Q   1   ’   1   2   2   0   1   1   2   0   1   0   2   0   0   9   2   0   0   8   2   0   0   7   2   0   0   6   2   0   0   5   2   0   0   4   2   0   0   3   2   0   0   2   2   0   0   1   2   0   0   0   1   9   9   9   1   9   9   8   1   9   9   7   1   9   9   6   1   9   9   5   1   9   9   4   1   9   9   3   1   9   9   2   1   9   9   1
Tier 1 Common Capital ($T)
!
Tier 1 Common Risk-Based Ratio (%)
!
Tier 1 Common Capital and Tier 1 Common Risk-BasedRatio for U.S. Banks
!
Tier 1 Common CapitalRatio has risen 38%since 2007 to an all-time high.
!

 
HPSinsight.com
80515thSt.NW,Suite700
 
Washington,DC20005
HPS
Insight
Thefourlargestbankshaveincreasedthisratiobythesameamount.Atthesametime,they’veincreasedthequalityoftheircapital,astheircommonequitytoassetsratiosareatnewall-timehighs.SoasmorepeopleinWashingtonclamorforhighercapitallevels,remember,banksnotonlyhavemorecapitalalready,butbetterqualitycapitalthaneverbefore.Similarly,forallthepresstheVolckerRulereceives,bankshavealreadydismantledandsoldvirtuallyallbutthebarestabilitytomakemarketsforclients.Proprietarytradingatbankshaslargelygoneaway,reducingso-calledspeculation.Personally,IwouldprefertorepealtheVolckerRule–itremainsasolutioninsearchofaproblem,butthereformisworkinginwaysSandyWeillwouldseeminglyapprove.Finally,Weill’scallforareturntoGlass-Steagallwasspicedwiththecommonconcernthatweshouldneveragainbailoutbanks.WeilliseitherunfamiliarwithDodd-Frank’sactualprovisionsorhassimplychosentojointhecollectionofeternaldisbelievers.Ifby“bailouts”Weillisreferringtothegovernment’sresponsetothefinancialcrisisin2008-2009,thenheshouldbepleased.Isupportedthatgovernmentresponse.Icontinuetosupportitandwouldsupportitagain.Butthat’snottheresponseyou’llfindinDodd-Frank.Instead,thelaw’sResolutionAuthorityonlyallowsthegovernmenttowinddown–notpreserve–failedfinancialinstitutions.Intheeventoffailure,itguaranteesthatbondholderswilltakelossesandshareholderswillbewipedout.ThepastthreeyearshaveseensignificantchangesthatWeillandotherscontinuetoignore.Rather,theyflackanoldrulethatwouldnothavepreventedthefinancialcrisis.Thefinancialcrisisactuallyshowedthatdiversifiedbanksweresaferthanthesimplercommercialandinvestmentbanks.AndasaresultofDodd-Frank,bankshavemaderealandsignificantreforms.Goingbacktoananachronisticlawwillonlyhobblebothourbanks’abilitiestocompeteintheglobalmarketandtheabilityofourregulatorstoregulatetheglobalfinancialsector.WhenGlass-Steagallwasbeingrepealedinthelate1990’s,economistMichaelK.Evans,thenoftheKellogSchoolofManagementatNorthwesternUniversity,wrotehowtheAsianfinancialcrisispresentedtheU.S.financialsectorwitha“uniqueopportunitytoparticipatefullyinthese[global]markets”andthatthefinancialservicesfirmsthattookadvantageofthesituationthenwouldhave“aninsurmountableleadformanyyears.”RepealingGlass-SteagallhelpedenableourbankstoexpandtheirservicesandgeographiestobestserveU.S.clients’globalneeds.Now,inthewakeofourownfinancialcrisis,aglobalizingeconomywithlargebanksthroughoutEurope,Asiaand

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