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Tuesday, April 9, 2013

Bank of England's Andrew Haldane takes on combination of complex rules and regulatory oversight

Reuters reports that the Bank of England's Andrew Haldane has escalated his fight to dismantle the combination of complex rules and regulatory oversight.  

He advocates simpler rules that are harder to game.  An example of a simple rule would be that banks provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

Regular readers know that the combination of complex rules and regulatory oversight has been used unsuccessfully as a substitute for the combination of transparency and market discipline.  Examples of where the combination of complex rules and regulatory oversight failed include banks and structured finance securities.
Bank regulators need to develop much simpler rules to make it harder for large financial firms to game the supervisory system, Bank of England official Andrew Haldane said on Tuesday. 
"We need to do a radical pruning, simplifying of our regulatory apparatus (that) places much less emphasis on what are unreliable measures of risk," Haldane, the BoE's executive director for financial stability, told a conference sponsored by the Federal Reserve Bank of Atlanta....
Examples of unreliable measures of risk include, but are not limited to, bank book capital level and bank risk based capital measures.

Bank book capital levels are an easily manipulated accounting construct.  Since the beginning of the financial crisis, bank book capital levels have been manipulated by the regulators through suspension of mark to market accounting and by the banks through implementation of extend and pretend on nonperforming loans.

Bank risk based capital levels are also easily manipulated as banks simply game their internal models.
"Complex frameworks if anything are easier to arbitrage, easier to game," he said....
Too Big to Fail banks lobby for complex frameworks precisely because these frameworks are easier to arbitrage and game.
The Dodd-Frank Act, the U.S. financial reform law that Congress passed in response to the financial crisis, is some 2,300 pages long, and has been criticized for its complexity and opaqueness.
As your humble blogger noted about Dodd-Frank, it was written by the banks' lobbyists for the benefit of the banks.  Not surprisingly, it is long on complexity and short on substance that will actually make the financial system safer.

In fact, it is long on complexity so as to keep opacity in the financial system.  Opacity that allows the banks to place proprietary bets and gamble with the taxpayers' money.  Opacity that allows the bankers to engage in bad behavior (see manipulating Libor).

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