Citigroup Inc (C), Wells Fargo & Co (WFC)–Leveraged Banks: How Much Is Too Much?

The regulatory capital that the banks have to hold, that gets really complicated. When you talk about banks being complicated, that stuff will make your head swim.

In the U.S., we adopted what was called Basel I. This was an international set of regulations that dictated how much capital needed to be held, but also how the capital is calculated. That’s what we’ve been using for a long time.

There was a Basel II standard that came out, that we haven’t really adopted. Part of that was that it used risk-weighted assets to calculate how much capital the banks had to hold, and there were some concerns over how the risk weighting worked.

Essentially, what you’re doing there is you’re saying, “Well, this asset is particularly risky, so you have to hold a lot of capital against it. This asset is less risky, so you don’t have to hold as much capital against it.”

Not only does that make for less certainty, and make things a little bit more murky, but the calculations, there’s a lot of … “room for discussion” I’ll say, rather than put a cynical view on it. There’s room for discussion in there.

Now we’re working on the Basel III standards, which looks like it’s going to be implemented in the U.S. and around the world. I don’t know that it really makes things more clear. I think it’ll make banks a little bit safer, but it doesn’t make things more clear.

I think the full Basel III regulations is like 900 pages. I’ll readily admit I have not read all 900 pages.

Rick Engdahl: What is “Basel,” is that a …?

Matt: Switzerland. For the city or town.

Rick: Oh, it’s a location.

Matt: It’s a location, yeah.

Rick: Got you.

Matt: It’s the Basel Committee, sitting there in Switzerland — where else — writing 900 pages’ worth of banking regulations, which floats some people’s boats, I guess.

Rick: Is it like one of those camera manuals, where it looks like a lot of pages, but it’s really because it’s translated into so many languages?

Matt: No. Unfortunately, it’s not. I wish that were the case.

The article Leveraged Banks: How Much Is Too Much? originally appeared on Fool.com is written by Matt Koppenheffer.

Matt Koppenheffer has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of C and Wells Fargo.

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