by Matthias Chang
September 20, 2010
The Global Too Big To Fail Banks are so precarious that literally anything
can trigger a collapse in the coming months.
I have read recent commentaries on
Basel III posted to various renowned
websites and financial publication, but they missed (or deliberately misled)
the underlying message of the proposals, the implementation of which will be
delayed till 2017 and some till 2019.
Basel III is pure spin and its timing was to
assuage the deep-seated fears that there are no solutions in sight to save
the fiat money system and fractional reserve banking.
The major global banks are all under-capitalized and this was all too
apparent when Lehman Bros. collapsed.
Banks were borrowing so much and so recklessly
to play at the global casino that when the bets went sour, they were staring
at a black-hole in the $trillions. In fact the banks are all insolvent.
The problem was compounded when the central bankers (all are corrupt without
exception) and regulators turned a blind eye to how bankers defined what
constituted “capital” so as to circumvent the need to maintain the capital
THE BASEL III SOLUTION
At its 12 September 2010 meeting, the Group of Governors and Heads of
Supervision, the oversight body of the
Basel Committee on Banking
Supervision, announced a substantial strengthening of existing capital
requirements and fully endorsed the agreements it reached on 26 July 2010.
These capital reforms, together with the introduction of a global liquidity
standard, deliver on the core of the global financial reform agenda and will
be presented to the Seoul G20 Leaders summit in November.
The Committee’s package of reforms will increase the minimum common equity
requirement from 2% to 4.5%.
In addition, banks will be required to hold a capital conservation buffer of
2.5% to withstand future periods of stress bringing the total common equity
requirements to 7%.
This reinforces the stronger definition of capital agreed by Governors and
Heads of Supervision in July and the higher capital requirements for
trading, derivative and securitization activities to be introduced at the
end of 2011.
Increased capital requirements
Under the agreements reached, the minimum requirement for common equity, the
highest form of loss absorbing capital, will be raised from the current 2%
level, before the application of regulatory adjustments, to 4.5% after the
application of stricter adjustments.
This will be phased in by 1 January 2015.
The Tier 1 capital requirement, which includes common equity and other
qualifying financial instruments based on stricter criteria, will increase
from 4% to 6% over the same period.
The Group of Governors and Heads of Supervision also agreed that the capital
conservation buffer above the regulatory minimum requirement be calibrated
at 2.5% and be met with common equity, after the application of deductions.
The purpose of the conservation buffer is to ensure that banks maintain a
buffer of capital that can be used to absorb losses during periods of
financial and economic stress.
While banks are allowed to draw on the buffer during such periods of stress,
the closer their regulatory capital ratios approach the minimum requirement,
the greater the constraints on earnings distributions.
This framework will reinforce the objective of sound supervision and bank
governance and address the collective action problem that has prevented some
banks from curtailing distributions such as discretionary bonuses and high
dividends, even in the face of deteriorating capital positions.
A countercyclical buffer within a range of 0% - 2.5% of common equity or
other fully loss absorbing capital will be implemented according to national
The purpose of the countercyclical buffer is to achieve the broader
macroprudential goal of protecting the banking sector from periods of excess
aggregate credit growth.
For any given country, this buffer will only be in effect when there is
excess credit growth that is resulting in a system wide build up of risk.
The countercyclical buffer, when in effect, would be introduced as an
extension of the conservation buffer range.
These capital requirements are supplemented by a non-risk-based leverage
ratio that will serve as a backstop to the risk-based measures described
In July, Governors and Heads of Supervision agreed to test a minimum Tier 1
leverage ratio of 3% during the parallel run period.
Based on the results of the parallel run period, any final adjustments would
be carried out in the first half of 2017 with a view to migrating to a
Pillar 1 treatment on 1 January 2018 based on appropriate review and
Systemically important banks should have loss absorbing capacity beyond the
standards announced today and work continues on this issue in the Financial
Stability Board and relevant Basel Committee work streams. 
THE LOOPHOLE &
ADMISSION OF INSOLVENCY
Since the onset of the crisis, banks have already undertaken substantial
efforts to raise their capital levels.
However, preliminary results of the Committee’s comprehensive quantitative
impact study show that as of the end of 2009, large banks will need, in the
aggregate, a significant amount of additional capital to meet these new
Smaller banks, which are particularly important for lending to the
sector, for the most part already meet these higher standards.
The Governors and Heads of Supervision also agreed on transitional
arrangements for implementing the new standards.
These will help ensure that the banking sector can meet the higher capital
standards through reasonable earnings retention and capital raising, while
still supporting lending to the economy.
THE IRON CLAD
CONFIRMATION THAT BANKS ARE IN DEEP SHITS
Please read all the passages which I have highlighted in bold in the above
If the banks were at all material times
adequately capitalized and the central bankers in collusion with these
banksters and fraudsters were prevented from manipulations, there would not
be any need for Basel III regulations.
In saying this, I am not in anyway conceding that even with these new
requirements, the banks will be adequately capitalized.
The simple truth is that as long as the derivative casino is still running
and banks are allowed to continue their off balance sheet activities,
nothing will be resolved.
The 2 tables below tell the whole story:
Source: Basel iii Compliance
Professionals Association (B iii CPA)
How can the ultimate capital requirement of 8
percent be adequate when leverage under Basel III is still allowed at the
astronomical rate of 33:1?
In the second table, and it is a no brainer to conclude that the
crisis (if we are lucky) may be “resolved” by 2015 but it is most likely
that it can be only resolved by 2017/2018 .
This is an express admission that all banks would require such a long
transition period to comply with the new requirements!
The stark reality is that the Too Big To Fail Banks do not have the ability
and or the means to raise capital at this critical juncture.
To use an analogy, the banking patient will be in Intensive Care until 2017,
which is rather optimistic for the projection implies that the patient may
be able to recover.
It is my view that Basel III is pure spin and is intended to convey the
impression that the central bankers and regulators have things under
control. This is a big lie!
I have said in my earlier article that the FED through QEI purchased toxic
assets from the banks and part of the monies were used to shore up the
reserves and part to purchase treasuries (to give an illusion of better
quality assets in banks’ balance sheet).
There are so much more, $trillions more of toxic waste that no amount of QE
(quantitative easing) can remove them. This situation does not even take
into consideration the toxic waste in SPVs - the off balance sheet mumbo
The FED and Accounting Bodies have suspended
accounting and regulatory rules that have enabled the banks to hide such
toxic waste in SPVs and not having to account for them in the banks’ balance
QEI has merely enable the Too Big To Fail Banks to continue some form of
banking activities thus deceiving the public that they are solvent and
prevent a bank run.
But the central bankers cannot have the cake and eat it as well. In trying
to shore up public confidence in banks with the introduction of Basel III,
they have inadvertently let the cat out of the bag and as the above two
tables show, the banks are all insolvent.
Additionally, whatever reserves that have been accumulated are insufficient
to stimulate further lending, because the banks have reached their limits
under the fractional reserve system. This is the reason for the contraction
of credit and not as one commentator has postulated that Basel III would
Two burdens are weighing down on the banks:
inadequate capital to meet liabilities
inadequate reserves under fractional
This is a big mess!
THE CONFIDENCE GAME
At this moment, I cannot give a precise time-line as to how long the FED and
the global central banks can prolong the confidence game, hoodwinking the
public and sovereign creditors that all is well.
When confidence in banks evaporates for whatever reasons, the consequences
will be ugly and there will be massive social upheavals across the globe.
The first indication that the game is up is when US treasuries are
increasingly purchased by the FED to make up for the shortfalls by foreign
creditors and to finance the ballooning US deficits.
All of a sudden, some entities may start to get real nervous and unload the
treasuries, and the FED steps in to shore up treasuries. Then, the tipping
point is reached and Hell breaks loose!
China is also part of this confidence game.
But, contrary to IMF and other renowned economists who are betting on
China’s and Asia’s so-called economic strengths, I take the view that when
US treasuries collapse, faith in all fiat monies will likewise evaporate and
there will be massive capital flight to commodities, especially gold, silver
Asian stock markets will be devastated and there will be volatile gyrations
in currency values.
Therefore, it is utter lunacy and recklessness for the Malaysian central
bank (Bank Negara) and the government to even consider allowing the ringgit
to be traded.
When confidence in dollar assets vaporizes, China will be caught right in
the middle. The third and final phase of the Global Financial Tsunami will
devastate Asian economies and with it, the greatest depression in history
Time Line? Between now and anytime in 2011. At the latest,
God help us.