Tuesday, July 3, 2012

Barclays emerges victorious over Bank of England

Barclays scored a clean knock-out of the Bank of England in its fight over whether the Bank encouraged a systematic attempt to rig the Libor market.  

While Barclays lost its top three officials, the Bank of England lost its bank information monopoly.

As a result of this argument, banks are going to be required to (or they will voluntarily) disclose on an on-going basis their current asset, liability and off-balance sheet exposure details.

With this disclosure, Libor can be based off of actual trades that market participants can confirm.

With this disclosure, bank managements will never again be put in a position where it is conceivable that the Bank of England is asking them to manipulate an interest rate.

With this disclosure, bank managements will end the focus on capital ratios that are meaningless because bank book capital levels are meaningless.  With this disclosure, policies like regulatory forbearance that keep zombie borrowers alive using 'extend and pretend'; suspension of mark-to-market accounting and public announcement of stress test results will be forever ended.

With this disclosure, the Bank of England will no longer be able to gamble with financial stability as market participants are no longer dependent on the financial regulators to assess the riskiness of the banks.  Market participants can independently assess the risk for themselves.  More importantly, based on this independent assessment, market participants can exert discipline on the banks to restrain their risk taking.

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