Saturday, June 16, 2012

Regulators prepare to back down on bank liquidity requirements

As reported by the Wall Street Journal, under intense industry lobbying, banking regulators are preparing to back down and soften their recently adopted policy requiring banks to hold a minimum percentage of their assets in liquid investments.

This is another glaring example of why banks must be required to provide ultra transparency and disclose their current asset, liability and off-balance sheet exposure details.

Unlike liquidity requirements that are unnecessary and capital requirements which are meaningless, ultra transparency allows market discipline to act on the banking sector and force the banks to recognize all the bad debt on and off their balance sheets.

Liquidity requirements are unnecessary because in a modern financial system banks have access to central bank funding.  The limit to a bank's liquidity is approximately the market value of its assets.  That liquidity requirements are unnecessary was confirmed by the Bank of England's Mervyn King.
"In current exceptional conditions, where central banks stand ready to provide extraordinary amounts of liquidity against a wide range of collateral, the need for banks to hold large liquid asset buffers is much diminished," .... "I hope regulators around the world will take note."
Capital requirements have been meaningless since the adoption at the beginning of the financial crisis of regulatory forbearance which allowed banks to keep zombie borrowers alive with 'extend and pretend' techniques and rendered bank book capital meaningless.  This comes from the OECD.

Ultimately, the only requirement that matters is ultra transparency.  Without it, banks are 'black boxes' holding an unknown amount of risk and bad debt that is dragging down the real economy.

With ultra transparency, the risk of each bank is known, the financial system has been cleansed of bad debts as they have been recognized and the real economy is growing again as it is relieved of the burden of carrying excess debt.

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