Can the EU Hold Out?

Over the weekend, new capital requirement rules for large banks were finalized. Known as Basel III, these rules will add as much as another 2.5% to some banks Tier 1 capital. That brings the total to as much as 9.5% for banks that are deemed to be too big to fail.

These new rules are designed to keep banks from over-leveraging and causing a repeat of the financial crisis. But it should also be clear that even a 9.5% Tier 1 capital requirement is not a big requirement. Banks will have no trouble raising their Tier 1 capital to the new levels by the 2019 deadline.

In reality, this is a token move and won’t affect the banks much. It definitely doesn’t do much to prevent another crisis. But it may be good news for banks stocks. One reason for the recent weakness in bank stocks is uncertainty of new financial regulations. With this Basel III agreement, some of that uncertainty is removed.

Big bank stocks are rallying across the board this morning.

There’s been quite a lot of criticism about the International Energy Agency’s (IEA) decision to release 60 million barrels of oil from strategic reserves around the world.

But the move is having the desired effect. Oil prices have fallen sharply since the announcement and are flirting with support at $90 a barrel.

We can also say that the move was well-timed, coinciding with weakening economic data and a strengthening U.S. dollar.

It will be interesting to see how much lower oil prices will fall. I suggested last week that the mid-$80s would probably be an attractive entry point for oil stocks. We’ll see if oil falls that low…

How long can the European Union, and the euro, hold out? The Greek debt crisis, and looming issues in other EU countries is putting quite a strain on healthy European countries like Germany who have to fund bailout loans.

There must be a point where the leaders of Germany, for instance, simply throw up their hands and walk away from the union. And I can’t say I’d blame them…

With the help of Goldman Sachs (NYSE:GS), Greece cooked its books to get into the EU in the first place. And Greek citizens are in denial that there’s even a problem. They are revolting against austerity measures that are a condition of bailout loans.

They say admitting a problem is the first step to fixing it. Greece should take note and be willing to do whatever is needed, because with out the EU, its troubles would be a whole lot worse.

The final Treasury bond purchases under the Fed’s QE2 program will occur this week. But while the Fed won’t be adding to its $2.86 trillion balance sheet, it won’t be reducing it, either.

The Fed will be reinvesting the proceeds from maturing Treasury bonds into new purchases that could total $300 billion over the next year. And it might not stop there. In fact, we should consider QE2 a perpetual stimulus program.

As always, feel free to write me anytime: [email protected]

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