Fed Approves Tougher Capital Standards, Bank Stocks Slip

       The day started on the upswing with the surprise announcement of China of a rate cut and the anticipated appearance of Bernanke before Congress.

       Yesterday the market had it's best day of the year and went back to being up for the year with the comments by Janet Yellen that suggested there could be more easing. However the market was somewhat disappointed when Bernanke basically reiterated what he's already said namely that if the economy takes a hit more could be on the table but that basically they aren't there yet.

        At the end of the day the Fed announced that it would go through with the tougher new capital standards under Basel III without softening certain provisions as the big banks had hoped.

         "The Federal Reserve released a proposal to enact an international agreement on higher capital standards for banks, known as Basel III, that largely rejects pleas by the U.S. banking industry to soften parts of the new standards."

          "The move, which came just before the market close, pushed financial stocks lower, including Bank of America [BAC 7.42 -0.22 (-2.88%) ] and Morgan Stanley [MS 13.41 -0.53 (-3.8%) ] ."

          "U.S. banks had pushed the Fed to allow them to more heavily count mortgage servicing rights and the unrealized gains and losses of certain securities toward their capital requirements than allowed by Basel III, but the U.S. central bank's draft rule closely follows the international agreement. "

         "The Federal Deposit Insurance Corp and the Comptroller of the Currency are expected to approve the proposal soon as well. "

          "The Basel agreement is the cornerstone of efforts by international regulators following the 2007-2009 financial crisis to make sure the global banking system is more resilient."

           "The new standards would force banks to rely more on equity than debt to fund themselves, so that they are able to better withstand significant losses."

           http://www.cnbc.com/id/47726367

           "Banks have mostly agreed this minimum level is necessary. The biggest banks, however, have balked at a part of the agreement to have 28 global "systemic" banks hold as much as an additional 2.5 percent capital buffer."

             "This provision would hit the largest international financial institutions such as JPMorgan Chase [JPM 32.81 -0.26 (-0.79%) ] , Goldman Sachs Group [GS 94.00 -0.96 (-1.01%) ] and Deutsche Bank [DB 35.83 -0.05 (-0.14%)  "

              "U.S. regulators had delayed putting this rule into place because the 2010 Dodd-Frank financial oversight law bans the use of work done by credit rating agencies in U.S. banking regulations, including those that assess bank capital. The agencies have struggled to find alternatives."

             "Banks have argued that some of the substitutes for credit ratings included in a proposed rule released in December will not be effective."

              "For instance, they have questioned whether relying on ratings from the Organisation for Economic Co-operation and Development (OECD) to gauge the riskiness of sovereign debt will work."

              "In the proposed final rule released on Thursday the Fed rejected this concern and said regulators will use OECD ratings."

               So there you go. Is this good news? Well clearly the banks didn't like it and investors sold away right off. Still it seems to me as bad a rap as regulation often gets it may well offer significant externality benefits.

               In time maybe it will offer a measure of confidence for investors to invest more. It has been argued that part of the problem since 2008 is that trust has been wholly lost in the system.