Banks committed sins leading to 2008, and they do continue to sin. But most bank transgressions really come from the past with mortgage backed securities. JPM was fined over $20B and BAC looks to be similar. As a taxpayer, I can find justification in too large to manage institutions paying homage to regulatory authorities in largess, in some fashion.....Certainly given 2008 consolidations and associated sins of failing banks that were consolidated into bigger banks. Consequence was the too big to fail idea. Now we see the too big to manage idea.
There is also the Whale Trade with J.P. Morgan, and the serious LIBOR fixing issue with BNP Parabas, a French bank. Still, U.S. is looking for about $10B in penalties from BNP. European authorities have requested consideration from U.S. authorities, but encountered denials.
Now, because of the BNP issue the EU Legislature is proposing as law a single bench mark to gauge price. Perhaps suggested in such a move is fixing European law to prevent major penalties from U.S. regulators. But using only one bench mark is objected to by the European Central Bank (ECB) as not a realistic indicator of true value. Where the ECB"s objection is factual, the EU's position marks a reasonable political line.
By virtue of the U.S. not bi-laterally discussing proposed U.S. penalties on European banks, the appearance conveyed by U.S. representatives is perhaps not only unfriendly, but also arrogant. Truth be told, we live in the same world. Further, Europe is our strongest ally geopolitically.
What would Winston Churchill say under these circumstances....Probably he'd let the finance ministers and bankers figure this out. But today, one really can't let the fox into the hen house. Unless, of course, we understand common ownership of the hen house.
On top of the U.S. Department of Justice, or other regulators seeking penalties, regulatory regimes are hard on banks. Obvious consequences are reduced bank lending, increased reserves and provisions for banks paying regulators. Also a consequence is reduced capacity to increase revenue to fill capital and retained earnings in order to meet regulatory requirements.
Bottom line of overall government action in terms of banking is reduced lending. Today, banks have to protect themselves, certainly if they have shareholders. Bank's are essentially guarding fractional reserve banking to their benefit, even if lending is a minor motivational force. Still, should banks not protect reserves in this environment, they will become an absorbed casualty among an all together glutted banking M&A forced market. Of course it wouldn't hurt if banks just played right.
True need is to find a way to keep banking out of its own hen house, and government not to compete for that same hen house through either regulation or its own lending. Therein resides the market. To accomplish a true market isn't by creating new derivatives of old assets whether they be failing or good. Rather, transparency and published market pricing is what's needed. That was proposed after the Great Depression, was instilled, and brought markets as they now exist, but now markets are in further need of transparency and access.
Changes needing to be made are updates to transparency and price discovery. There are so many new products on the market today, and so many are hidden behind a curtain whether by price, fundamentals or correlation . Eliminate that curtain, and global investors will be able to consider price in comparative terms.
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