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HPSinsight.com 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 ANOTHER ALL-TIME HIGH IN THE FIRST QUARTER OF 2012!
Tier 1 Common Capital and Tier 1 Common Risk-Based Ratio for U.S. Banks! 14! Tier 1 Common Capital ($T)! Tier 1 Common Risk-Based Ratio (%)! Tier 1 Common Capital Ratio has risen 38% since 2007 to an alltime high.! 1.4! 1.2!

Tier 1 Common Risk-Based Ratio (%)!

12!

Tier 1 Common Capital ($T)!

1.0! 10! 0.8! 0.6! 8! 0.4! 2! 0!

6!

1991!

1992!

1993!

1994!

1995!

1996!

1997!

1998!

1999!

2000!

2001!

2002!

2003!

2004!

2005!

2006!

2007!

2008!

2009!

2010!

2011!

Source: FDIC, SNL Financial!

Q1’12!

 

 

 

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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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the  rest  of  the  world,  do  we  want  to  hinder  the  competitive  advantage  of  U.S.  firms   and  reduce  the  reach  of  our  regulators?       Tony  Fratto  is  a  Managing  Partner  at  Hamilton  Place  Strategies,  former  Assistant   Secretary  at  the  U.S.  Treasury  Department,  and  a  former  White  House  official.  He  is   also  an  on-­‐air  contributor  for  CNBC.    

 

 

 

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