Jonathan,
I read both articles that you sent me.  
1) https://en.wikipedia.org/wiki/Capital_requirement
2) http://www.forbes.com/sites/stevedenning/2011/11/22/5086/

My question was, "Are banks making loans based on assets associated with previous loans?"  

The articles were interesting and informative, but they didn’t address the issue directly.  Nevertheless, it appears that there are two factors associated with bank reserves.  1) Deposit reserve requirement, and 2) Liability to Asset ratio.  

Definition according to http://www.investorwords.com/730/capital_requirement.html
Capital Requirement: The amount of money a business needs for its normal operations. Also, the amount of cash and easily liquidated assets that a broker/dealer or bank needs to meet SEC regulations, usually expressed as a proportion of total liabilities. In general, the kind of assets that can make up the broker-dealer's capital requirement are strictly defined.

Regarding your article: https://en.wikipedia.org/wiki/Capital_requirement
The capital requirement essay discussed the history of the various criteria used to regulate capital requirement of banks.  In general the capital requirement refers to the ratio of assets to liabilities.  A healthy asset:liability ratio is around 8%. There are several types of assets: Tier 1, and Tier 2, with Tier 1 being the more conservative and liquid.  The definitions of assets and liabilities and the Tier 1 and Tier 2 requirements were set at a series of meetings called Basel 1 (in 1998), and Basel 2 (in 2004).  Thes accords defined the types of assets that are considered acceptable in meeting those capital requirements.

Possibly those assets could have been based on loans, but it seemed more like assets easily convertible to cash, rather than loans made on loans.

A related question is, “How does the value of the collateral that the banks hold relate to their solvency?”  We have seen a drop in real estate prices, and the resultant insolvency of various banks due to the drop in the value of the asset they own in relationship to the money they owe.  Apparently the house itself is part of the collateral for the loan, and hence is an asset that secures the loan.  Is the house an asset or liability?

Regarding the second issue you referenced:
http://www.forbes.com/sites/stevedenning/2011/11/22/5086/

"Out of the top 25 subprime lenders in 2006, only one was subject to the usual mortgage laws and regulations. The nonbank underwriters  made more than 12 million subprime mortgages with a value of nearly $2 trillion. The lenders who made these were exempt from federal regulations."

Regarding the CRA and the subprime mortgage crisis. I have heard people deny that the subprime mortgage crisis was caused by the government and its enforcement of the Community Redevelopment Act, and say that instead it was greedy Wall Street investment bankers and/or other non-bank institutions (e.g. Countrywide, Lending Tree...) that were the cause of the extreme bubble in housing prices. This was of course the opinion of the Forbes article you sent. But, I think the author, and other apologists for the government, have ignored the sequence of events leading to the change in policy which first coerced subprime mortgages. There was a sequence of pollution of the mortgage pool, and an eventual collapse of the banking system and economy, that was initiated by the government's requirement to make subprime loans.

The “Greedy banker” caused version of the story was examined in a recent Wall Street Journal article: orDownload file

The sequence of events as I see it:
The initial requirement to make subprime loans, which was clearly demanded by Congress, (and may have been pressured by ACORN) was then followed by a rush to compete, take advantage of, and be compensated for participating in this new Congress-mandated lending opportunity. It looks like Wall Street took advantage of the regulatory environment which required banks to make low quality loans. It was the very profitable bundling and selling at substantial profit these new financial instruments which brought the other non-bank entities into enthusiastic participation in the pursuit of writing subprime loans. The secondary mortgage market (the people who bought and held mortgages for years, Fannie Mae, and Freddie Mac, and the sellers & holders of the Mortgage Backed Securities) provided the huge/massive/insatiable demand for the subprime loans. Thus, a market which had large profit margins and high demand, provided the commissions to incentivize massive promotion in both sales of MBSs and loan origination. It is simplistic to simply look at the back-end of the sequence (banks marketing MBSs and say, "This problem had nothing to do with government regulatory policy. It couldn't have been caused by Congress’ mandate, because many people are participating in the making of subprime loans who were not subject to government regulation. Therefore, the problem must be greedy wall street bankers; yes, they must have caused the problem.” No, the greedy Wall Street bankers took a really bad financial instrument, packaged it, and sold it to innocent people, bet against it themselves, and the widespread infiltration of unfulfillable financial promises brought down our financial system.  The bankers should have said no, this product is trash, they should have informed their customers, they simply shouldn’t have marketed it at all - but Congress mandated that the financial substrate, the subprime mortgages, exist.  The financial system is based on trust, and the trust was betrayed, and the government was the one that first broke the trust, and the rest of society followed in lock step.

The attached article describes the influence of ACORN on the regulatory process. It appears that ACORN was one of the prime movers, and that the CRA was the seed that initiated the entire change in policy regarding loan qualification. Opportunity and greed acted with he other forces of human nature turned a bad policy into a worldwide financial disaster.

 Again, the Forbes article (and other government/apologists) have argued that, "It couldn't have been the government forcing banks to do subprime mortgages that caused the financial meltdown.  They argue that there were many other institutions which were not under the mandate of the CRA that made even more subprime mortgage loans than the regulated banks did."

Again, I suspect that this flood of subprime mortgages was produced by the sea change that was caused by the door opened by subprime mortgages mandated by government, and this under pressure from ACORN. The financial community (the secondary mortgage market and banks) coped with the introduction of this new economic toxin by bundling the subprime mortgages with bona fide-qualified mortgages. The environment of the time was one of extremely low interest yield on savings, pension funds, bonds... because the Fed had lowered the interest rates so low, thus the long term, large cap, investment community was extremely hungry for any investment vehicle which could promise high returns, and absorb huge amounts of saved capital. The MBSs were mis-rated as AAA, either because of Wall Street and Rating Agency collusion, or actual erroneous calculations and modeling.  Either way, a new financial vehicle was now a player in the market for capital. Only a few economists (and George W Bush, who wrote 16 letters to congress warning of the situation -- although he didn't use the force of the bully pulpit and appeal to the masses to stop it, and the NYT who wrote an article in 2002 of the dangers if the economy slowed, and the Wall Street Primary dealers who bet against them) knew what was coming.

Wall Street used the hunger of the investing environment, and the appearance of high return, low risk, investments to lure massive transfers of investment capital into these toxic vehicles. The incentives of profit, bonuses, and high commissions for sales drove the wall street broker/salesmen-teams into high gear, which gave even more incentive to create more loans to create more of these investment vehicles to sell. It was as though the investment banks were giving out food to hungry pigeons -- it was a feeding frenzy. The consumers were clamoring for the product they were selling, and the salesmen/investment bankers were motivated to sell because of the large commissions/profits they made on each sale.

This new financial vehicle was based on a flawed theory that the system could absorb the "small percentage" of Subprime Mortgage loans. The motivation for making these loans was a based on a social engineering theory that poor people would take pride in ownership of their homes, and that would help them rise out of poverty. Thus, rather than being required to be supported by government programs, private enterprise could be forced to play the role of charity.

But, the intervention force was too small to inspire men to make the deep changes needed in work ethic, education, job market, opportunity, and life perspective. Thus, we only saw an economy boosted artificially by cash infusions based on borrowing, but without a concomitant increase in broad based domestic production.

Certainly production levels had met consumption levels, but the domestic consumers driving the bubble in consumption were not the ones producing value at a level commensurate with their rate of consumption. Thus, with the inevitable saturation of the loans for SPMs (and the 2nd mortgages to pay for consumption) ended, the economic pressure to consume ended, and home prices plummeted.

In 2008 the crash was triggered by a default in the commercial paper market, banks failed, bailouts began, and the Great Recession ensued. To hold the regulatory policies of government as irrelevant in this cause effect sequence seems inaccurate.
T.


P.S.

http://www.rushlimbaugh.com/daily/2011/12/07/a_mortgage_broker_on_rapid_credit_rescores_for_subprime_loans

Rush had a caller on recently who was involved in making subprime loans.  She said there was pressure from Fannie Mae & FHA, to make these loans.  They got people qualified for a loan by a process called “re-scoring”, which involved sending the applicant’s information to an agency that could change their credit score to 700 as long as the person’s credit was above 580.  These non-bank institutions were provided with wholesale lines of credit that enabled them to make large numbers of loans very quickly.  Of course this is hearsay evidence, and I have no way of discerning how credible this caller was.  If it is true, it fills in a piece of the picture that makes the rapid rate of issuance of SubPrime Mortgages understandable.  Possibly this is the facilitation of loan eligibility that was referred to in the Wall Street Journal article that discussed the SEC suit against Fannie and Freddie.