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As the Banks Celebrate Relaxed Requirements, Risk (for Everyone) Increases

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Will these more relaxed rules cause another global fiscal crisis?

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Big global banks would seem to have clear sailing ahead now after a series of announcements made this week resolved some lingering mortgage issues and removed, at least from the near-term picture, what could have become costly new regulatory requirements. But it's worth considering that another piece of good news for the big banks may also have added a new set of risks to the equation.

In no particular order, here is what banks are able to celebrate. First, 10 banks agreed to an $8.5 billion settlement that will put an end to regulators' allegations that they didn't follow proper foreclosure procedures. While that may sound like a lot of money, don't worry; the banks aren't likely to be hurt by the requirement to make restitution to millions of homeowners. JPMorgan Chase (NYSE:JPM), for example, has reported total net income of about $65 billion over the last five years (from 2007 to 2011), and its interest income has ranged from $61 billion to $71 billion a year in that period.

Bank of America (NYSE:BAC), which signed on to the foreclosure deal, also agreed to a separate $11.6 billion settlement with Fannie Mae over problematic mortgages. The bank agreed to pay $3.6 billion in cash to the government-controlled mortgage finance giant and to buy back $6.75 billion worth of loans it and Countrywide Financial, which it bought in 2008, had sold to Fannie Mae. It will also pay $1.3 billion to compensate Fannie Mae for loan servicing fees.

These agreements almost certainly are not the last that the banks will reach with regulators and others over the mortgage lending abuses of the beginning of the last decade. And the banks are still operating in "repair mode," especially those like Bank of America and Citigroup (NYSE:C), that came the closest to toppling over the precipice at the height of the crisis in September 2008. As more and more of these agreements are struck, the shadows that make it difficult for investors to calculate the value of these franchises will begin to clear.

Adding to the banks' bonanza, it seems at first glance as if the decision over the weekend by the Basel Committee on Banking Supervision to postpone the full implementation of new liquidity standards required of lenders is a big love letter to the banks. In many ways it is. The Liquidity Coverage Ratio is designed to prevent a repeat of the events of 2008, when banks discovered – to their panic – that they couldn't readily sell assets to meet de facto runs at the height of the crisis. The goal of the new ratio, set in place by this global panel of overseers, is to ensure that doesn't happen again by requiring that the banks have enough readily saleable assets on hand to match against the extent to which their assets are a "flight risk." Banks would be required to have enough readily sellable assets on hand to cope with outflows that last for 30 days.

The original plan was for banks to toe this line by 2015, even though it would have required raising more than $2 trillion of new capital. That's a tall order, as Europe struggles to avoid widespread recession and regulators fret about the anemic, fragile pattern of economic growth in the U.S. What would happen if the need for new capital causes banks to rein in lending and starves the economies of these regions of funds businesses require for expansion? That is a case that banks have carefully laid out when lobbying against new regulations of various kinds, and clearly it has fallen on receptive ears. The revised plan now calls for the requirements to be phased in more gradually, delaying full implementation by another four years and requiring only 60 percent of it to be in place by 2015.
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