Monday, April 30, 2012

Confirming ineffectiveness of bank capital ratios, France and UK argue over question of how much

First, I apologize for the lack of posts over the last several days.  I encountered unexpected technical difficulties while traveling.

Reuters reports that France and the UK are disagreeing over the level of capital that banks will need to hold in the future.  France wants lower levels and the UK wants higher levels.

This argument is much like arguing about the arrangement of deck chairs on the Titanic after it hit the iceberg.  Bank book capital levels are so highly manipulated that the OECD sees them as meaningless.

The argument does highlight one weakness of relying on regulators.  That weakness is the natural bias to engage in a race to the bottom.

Large international financial institutions are fully capable of moving their operations to the country with the weakest banking regulations.

Britain clashed with France on Wednesday over demands that London be allowed force banks to top up capital beyond new EU levels, diplomats said, in a long-running dispute threatening to undermine a central plank of European financial reform. 
The European Union is attempting to translate higher capital standards set by the Basel Committee of regulators and central bankers into EU law by the end of this year, a move to make it costlier for banks to engage in high-risk lending or investing....
And, much more importantly, to show that regulators can create a credit crunch at a time when the global economy is trying to recover from a deep recession.
Britain argues it is entitled to take extra steps to make banks safer, to protect the interests of taxpayers who could be called on to bail them out if they face collapse. 
But France is concerned that international banks based in London could cut lending elsewhere in Europe if they have to beef up capital.
These positions highlight why it is difficult to agree on global regulations on issues like capital standards.
Some diplomats suspect the dispute is fuelled by concern that deposits and other business might flow to British banks were they to be better capitalized than French and German rivals and thus safer in the eyes of investors....
The diplomats highlight how easy it is for the banks to play the regulators off against each other.  
Clarifying the precise rules on capital, almost five years after the start of the financial crisis that toppled some lenders and hit many countries hard, would remove some uncertainty for banks, already nervous about lending as Europe slides into recession. 
The new European capital regime will also influence how stringently Washington interprets the global Basel standards on Wall Street.

"It is a very political question," said one French diplomat.... 
One diplomat complained about countries trying to carve out exceptions that best suit them. "They have made a Swiss cheese out of it," he said.
Finally, having already made Swiss cheese out of the bank capital regulation shows yet again how meaningless bank capital ratios are outside of a convention filled with economists who failed to predict the financial crisis.

Regular readers know, that ultra transparency does not suffer from the same short-comings as bank capital.  It is easy to agree on a global standard of what constitutes ultra transparency:  disclosure on an on-going basis of each bank's asset, liability and off-balance sheet exposure details.

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