Banks simply cannot fail

March 16, 2023 • Estimated Reading Time: 6 minutes

Bank regulations are rarely very sexy, and nor are they ever particularly interesting. Most people, including myself, have never had to deal with handling regulatory capital and so don't know the actual ins and outs of the system.

However, what I am quite good at is spotting human behaviour and also smelling steaming piles of shite from the noise.

And let's get one thing straight...

If banks weren't allowed to fail in 2008, they doubly will not be allowed to fail now.

And it's for the simple reason that regulators need to be seen to have understood the future risks - which of course they simply won't have done, as we are seeing with Credit Suisse.

Where to begin though?

Enter the Basel Regulations

I'd like you to read this idiot's guide on Basel Regulations.

The Basel III regulatory framework consists of several documents issued by the Basel Committee on Banking Supervision (BCBS), which provide guidance on capital adequacy, liquidity, and leverage requirements for banks.

The primer above is all very complex and whatever.

But d'ya know what?

You don't even need to understand it; you just need to see the extent of change and additions to regulations that had occurred post GFC to prevent it from happening again.

There's 509 pages of completely boring stuff comprising the Basel III (2017) regs, made up of 3 documents....

The Basel III framework, the Basel III framework: regulatory capital and the Basel III framework: supervisory review and market discipline.

Again, you don't need to know any of this, but to compare to Basel II and I, there are more pages and more regs for banks to follow, with Basel II (2006) having 347 pages in total and Basel I (1988) having just 30 pages.

I'm setting the scene here for showing how there's a saving face element to all this.

VerySmartRegulatorsAndLawyersAndCentralBankers™ will not want to be shown up for the follies in their VeryImportantWork, even if they have glaring holes in them which have been spoken about at length (by yours truly, save the trumpets and fanfare).

And the VerySmartRegulatorsAndLawyersAndCentralBankers™ in Europe have forgotten, blissfully, about their debt crisis back in 10/11, because domestic banks are allowed to hold sovereign debt at a risk weight of ZERO (mental), which means they don't need to hold any regulatory capital against their domestic sovereign bond holdings - yes, even though sovereign debt was literally the cause of the Eurozone almost vanishing a decade and a bit ago.

And we've just seen the Credit Suisse situation 'resolution' (in very light quotation marks) as an example of this.

What I'm saying is that although there are these glaring risks, the simple fact that there are these glaring risks means that thre regulators will be entirely reactive to face save, just as they have always been and will always be - but rather than the focus be on the US, it should squarely be on Europe in terms of order of magnitude...

Having said that, it seems like the Basel regs in the US weren't sufficient in keeping the SVB disaster from happening either...

What's the trade for next week, Belle?

Well, I take you back to this piece that Tim wrote.

The trade is whatever interest rate futures say the trade is.

See, there's a big issue with the next Fed meeting that, in my view, can get people caught out.

If they pause, in my opinion there is a GREATER chance of the market pushing lower as it says to itself...

'What the fuck? What is up?'

What happens to risk in that scenario? Well, it goes offered in the short term.

But FX is likely to have the better opportunity.

See, if the Fed goes on pause, they send a signal to other central banks that they likely need to do similar, which means their respective bonds get a little bid, but the overarching case for pause means the dollar is likely to outperform on a risk off perspective.

The change in rates is shown nicely here...

This would be how I would play next week if there is a pause.

Short EURUSD into the end of the week.

Yes, it goes against all common sense, but markets aren't common and rarely do they have any sense.

There is enough of a deviation from previous rate pricing to permit a trade lower in my view, and that is all the market has been focused on for the past 3 months - I don't think that shall change next week.