Sunday, August 4, 2013

BIS blames creditors and bank regulators for current eternal financial crisis

As reported by the Telegraph, the BIS laid the blame for the current ongoing global financial crisis on the creditors (banks) and their regulators.

Specifically, the BIS said the mechanism for dealing with the excess debt in the global financial system is jammed because bank regulators refuse to require banks to recognize upfront the losses on their debt.

By design, banks are suppose to absorb upfront the losses on the excess debt so as to protect the real economy.  If they do not do so, the burden of the excess debt is place on the real economy.

This burden takes two forms: debt service and misallocation of capital.  Together these forms of burden result in the real economy not having the capital it needs for reinvestment and growth as well as not properly allocating the capital it does have.

A clear recipe for economic stagnation.

Your humble blogger predicted this economic outcome at the beginning of the financial crisis when global policymakers and bank regulators adopted the Japanese Model for handling a bank solvency led financial crisis.

Under this model, the mechanism for dealing with losses on excess debt is intentionally jammed as bank book capital levels and banker bonuses are protected at all costs.

Regular readers know that your humble blogger also pointed out that with adoption of the Swedish Model under which banks recognize upfront the losses on the excess debt the real economy is protected.

It is nice to have the BIS agree with my analysis.
The Switzerland-based watchdog said unprecedented imbalances have built up in the global system and these are failing to self-correct because the mechanism is jammed.... 
The BIS said European banks played a huge role in stoking the pre-Lehman credit bubble. They rotated $1.25 trillion into US debt alone between 2003 and 2007, greater than the combined purchases of Asia and OPEC. It said banks funnelled money into southern Europe regardless of risk in "expectations of a bail-out" if any country got into trouble. 
"European banks were negligent in assuming – and their regulators in allowing – such exposures. Overlending was as responsible for the ensuing crisis as over-borrowing."... 
The watchdog called for "symmetry in adjustment between creditors and debtors" to avoid repeating the 1930s, warning that global recovery will remain stunted until the creditors chip in.

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