The latest eye-popping number is $30 trillion, produced by
lobbying firms and banks to support their view that many new
regulations will be expensive.
Imagine a situation in which the world's banks have to find as
much as $30 trillion to comply with just one new regulation. That
might be something of a stretch, given that the gross domestic
product of the United States is about $15 trillion, and the world's
10 largest banks hold $25 trillion in assets.
Yet a banking industry group recently looked into a new rule and
sketched out a possibility in which banks would be forced to come up
with as much as $30 trillion in cash.
The potential cash call is outlined in a letter the International
Swaps and Derivatives Association, or I.S.D.A., sent in September to
regulators. It is the latest eye-popping number that lobbying firms
and banks have produced to support their view that many new
regulations will be enormously expensive -- and the big, scary
numbers seem to be gaining traction.
Some of the concern may be warranted, especially in Europe, where
certain stressed banks have had trouble borrowing regular amounts in
the markets. But a deeper look at the industry association's figure
of $30 trillion suggests that many of the worries might be overdone.
The gargantuan sum relates to the market for derivatives, which
are financial contracts that banks and investors use to bet on
interest rates, stock prices, the creditworthiness of corporations
and the like. Derivatives played a central role in the 2008
financial crisis. The market for many contracts was opaque, which
stoked panic when certain players started to falter.
Before the financial crisis, big participants like large banks on
Wall Street were often able to avoid following certain rules
intended to make the market safer. One of those practices involves
something called initial margin. This is the cash or easy-to-sell
assets that parties have to set aside at the outset of a derivatives
trade. If one side cannot pay up, the other side can make a claim on
the initial margin.
Now, regulators want to tighten up the margin rules. To do so,
they are introducing regulations aimed at pushing derivatives trades
through entities called central clearinghouses. These organizations
effectively agree to pay out if one side of the original trade
Because of that pledge, clearinghouses have to make sure they can
pay if one party defaults. One way that they do so is to demand
margin from the parties that trade through them. But a large number
of derivatives trades will not necessarily go through
clearinghouses, even after the overhaul is in place. Such trades
will still be arranged directly between two financial firms.
Regulators have proposed rules that would require firms to supply
initial margin on such so-called bilateral trades, too. Those rules,
which would not apply to existing trades, may not come into effect
until late 2013 in the United States.
The I.S.D.A. and many others want to stop or water down those
margin rules on bilateral trades. In its paper, the association
argued against initial margin rules, saying they were "likely to
lead to a significant liquidity drain on the market, estimated to be
in the region of $15. …