Extra Bank Capital Means 'Global Recession': Bove
New capital requirements proposed by global regulators demanding that the biggest banks hold extra capital by 2019 will bring about a new recession, Rochdale's vice-president for equity research Dick Bove wrote in a weekend market note.
On Saturday, the Group of Governors and Heads of Supervision (GHOS) met in Basel and proposed a progressive common equity tier 1 capital requirement surcharge for big banks ranging from 1 percent to 2.5 percent, depending on the bank's size and systemic importance.
Thus, the largest and most systemically important banks will have to have 9.5 percent or even 10.5 percent tier 1 common equity ratios, if the proposal is adopted, Bove wrote in a market note released Saturday under the headline "Central Bankers Vote for Global Recession."
"This vote comes at a time when European banks should be writing down their holdings of sovereign debt not just the debt of Greece which has effectively defaulted," Bove wrote.
The proposal ignores "the total failure" of the policy of printing money in the U.S. to boost its economy, "a failure caused by the stringent capital and liquidity ratios already in place on American banks," he added.
The measure is bad for the global banking industry, which will be forced to raise hundreds of billions of dollars in new capital or cut down on business at a time when governments want banks to expand lending to stimulate the economy, Bove noted.
"The legislators and regulators never understood what caused the financial crisis," he wrote. "They have never acknowledged their part in facilitating the events that led to the crisis. Now having failed miserably in meeting their responsibilities on the way in to the crisis they are perpetuating their mistakes by over-reacting by swinging in every direction without regard to the consequences."