Salient to Investors:

Big banks claim a safer financial system would be bad for the economy because tougher banking rules will squeeze their lending and hold back investment.

Markets disagree. On July 9, the day regulators published their proposal, the S&P 500 Index rose 11 points and the 10-yr US T-note held steady. On July 2, when Fed Governor Tarullo announced regulators’ intention to boost capital requirements, both were largely unmoved. On June 21, when Bloomberg reported that regulators were considering the new capital rules, the S&P rose 4 points and the 10-year Treasury fell.

Each $100 in assets should be funded with at least $10 in capital – the global minimum is $3.

Banks currently have an incentive to be big and dangerous, because they believe the government will rescue them in an emergency. Currently most of the big banks have so little capital that investors can’t be sure they are solvent.

While big banks’ funding costs could rise, increase capital would level the playing field for smaller banks et al,who could pick up the slack in lending. The IMF says that added capital would improve the banks’ capacity to keep credit flowing during economic downturns.

Read the full article at

Click here to receive free and immediate email alerts of the latest forecasts.