Monday, June 25, 2012

BIS adopts Swedish model as Banks need 'push' to avoid prolonging crisis

Bloomberg reports that the Bank for International Settlements, the central banks' bank, has adopted the Swedish model for handling a bank solvency led financial crisis.
Banks will need a “healthy push” by governments to fix balance sheets, abandon risky businesses and serve the public to avoid prolonging the financial crisis... 
Almost four years after the collapse of Lehman Brothers Holdings Inc., lenders still hold overvalued assets and are postponing necessary recapitalizations while relying on official funding, especially in Europe... 
 Banks are also returning to risks akin to those that led to the crisis .... and governments need to put more pressure on them by enacting and enforcing new rules. 
“Public policy must move banks to adopt business models that are less risky, more sustainable and more clearly in the public interest,” the BIS said in the report. 
“Governments can give the banking sector a healthy push in this direction...
Please re-read the highlighted text as the BIS has summarized why and called for policymakers to adopt the Swedish model with ultra transparency.

It is only under the Swedish model with ultra transparency that

  • Banks are required to fix their balance sheets;
  • Banks are subjected to market discipline to adopt less risky business models; and
  • Banks focus on activities that support the growth of the real economy.
Ultra transparency is the lever to effect these changes as banks are required to disclose on an on-going basis their current asset, liability and off-balance sheet exposure details.  With this information, market participants can independently assess the banks and exert discipline to force the banks to clean up their balance sheets, reduce their risk and support the real economy.

Finally, your humble blogger is pleased to note that pursuing the Swedish model with ultra transparency is no longer an idea being proposed and championed by a fringe blog, but rather it is an idea that has now officially moved into the mainstream and been championed by a leading international regulatory institution.

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