If I emphasise three things we should focus on in a firm and, as I occasionally get asked by supervisors, what if it is the fourth thing that blows the firm up. Well I've made that judgment. It may not be the right judgment in retrospect, but it is the one that I've made.
Tuesday, October 23, 2012
Top UK bank regulator wants to gamble with financial stability
In a dramatic display of how bank regulators blithely gamble with financial stability, Andrew Bailey, the man who will head up the Prudential Regulation Authority overseeing 300 UK banks, explained in a Telegraph article how the buck stops with him:
The wee problem with this statement is that if his judgment is not right in retrospect, the banking system will have blown up at enormous cost to the real economy and society.
It is entirely unacceptable to have the financial system dependent on one person's judgment.
Particularly an individual who did not publicly predict our current financial crisis. If he didn't have the foresight to predict the current crisis there is absolutely no reason to believe he will be able to predict the source of the next financial crisis.
Mr. Bailey was not alone in not predicting our current financial crisis. Prior to the crisis, all of the global bank regulators were saying how risk in the banking system had been reduced. Clearly, this was not true.
One of the most important lessons learned from the financial crisis is that the financial system must not be dependent on regulatory judgment when it comes to assessing the risk of the banks.
Regular readers know that there is only one solution that eliminates dependence on regulatory judgment: require that banks provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.
With this information, each market participant can use their own judgement of what to focus on when they independently assess the risk of the banks. Based on the result of this assessment, market participants can then adjust their exposure to the banks according to the risk of each bank and not rely on bank regulators.