There is much talk and to do about Basel III and capital ratios of banks. Is 7% or 9% the right number, or should it be even higher. The reality is the ratio is really not the issue. It is the definition of what is accepted as capital and to what haircut for Tier I capital. The ratio could be 5% if the definitions were strict or 15% if they are weak. Here is an example. CMBS bonds can be counted if they are ranked AAA, even though we all know that CMBS AAA is not really AAA in the strict sense. We all saw what happened to the bond prices in 2009. We saw downgrades. We see Greek sovereign debt really being in default even though the EU is going to craft a make believe refinancing that will let everyone claim there has not been a default. You get the idea. So clearly cash deposits are real, where the definition of risk adjustment on any given security is a political one being made to assure that the truth about many European banks is once again hidden and the can is kicked further down the road of hope for better times.

The major US banks have been building capital and most are probably over capitalized compared to the regulatory requirements. Bank of America is the outlier because when they took over Countrywide they cut a terrible deal. Ken Lewis should have done what Jamie Dimon did when he took over Bear, and gotten some loss backstop. Although he was essentially forced to buy Countrywide by the government and the Fed, he should have pushed back much harder and gotten the backstop. That deal badly damaged the bank for many years as we see now. TARP for some banks like JP Morgan, who did not need the cash but were forced to take it, was actually a profit windfall. They were able to take the excess $25 billion and make a spread when there was no loan demand, and at least they made added profits which let them build reserves that they can now release to support current earnings.

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