Barney Frank's House bill H.R. 3996 - impact on secured lending

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Bloomberg: [FDIC lead Sheila] Bair, in a honor to lawmakers released today, endorsed a proposal that was additional terminal week to the regulatory upkeep governing making its way finished the House Financial Services Committee. It would order secured creditors, same repurchase commendation lenders and the agent Home Loan Bank system, to assume losses of as much as 20 percent to counterbalance the costs of a systemically momentous slope failure.

In constituent to uncovering a questionable way to counterbalance costs of rotation downbound a too-big-to-fail hospital (and possibly all banks), this assets of the business upkeep governing module hit whatever another consequences:

1. It module attain it significantly more pricey for these institutions to take funds modify if they locate treasuries as collateral.

2. Any perverse news about a limited hospital or the business grouping as a whole module intend lenders streaming for the fences forcing rapid unwinds. This module attain Lehman countenance same a gradual process.

3. It may defeat the repo market. Repo is utilised by money market funds, corporations, pensions, etc. to locate funds on a secured basis (taking in collateral). As an hospital if you hit short-term change and you don't poverty to deposit it with a slope (unsecured), your only choice is to add it to a slope on a secured basis via repo (taking in treasuries as confirmatory for example). If this choice is condemned away, institutions module requirement an alternative such as the ability to deposit change with the Fed.

4. This module provide foreign banks an unfair plus by funneling repo lending (secured deposits) to non-US banks, making it cheaper for those banks to money themselves.

5. US banks module essay to intend around these laws by creating off-shore finance vehicles that are not subject to US banking legislation, making banking supervision that much more difficult.

As we discussed before, knee-jerk reaction regulation is not ever the answer, but in this case could speech an unconditional hardship for the US business system. It behooves the US legislators to andante downbound their semipolitical posturing and essay to understand how the finacial grouping actually works in practice.


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