Tuesday, September 3, 2013

BoE's Carney would like bank reform that ends TBTF and fragmented regulation

Reuters reported that the Bank of England's governor, Mark Carney, is worried about the risk to economic growth from Too Big to Fail banks and fragmented banking regulation.

Regular readers know requiring banks to provide ultra transparency ends both the problem of Too Big to Fail and fragmented banking regulation.

If banks disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details, they become subject to market discipline.

Market discipline occurs because market participants link a bank's cost of funds to their independent assessment of its risk level.  Market participants make this linkage because they limit their exposure to each bank based on what they can afford to lose given the risk of the bank.

When market participants limit their exposure to what they can afford to lose, then no bank is Too Big to Fail as there are no contagion effects from its failure.

Market discipline also addresses the issue of fragmented banking regulation.  Market participants will exert discipline on banks to restrain their risk taking while at the same time improving their liquidity and ability to absorb losses.

Bankers say privately that solving too-big-to-fail will be hard but that success would make other post-crisis reforms almost irrelevant as lenders would not act recklessly again in the knowledge there will be no more public rescues. 
Solving Too Big to Fail is easy: require banks to provide ultra transparency and disclose their current global exposure details.

The banks realize that all of the complex regulation and regulatory oversight proposed and implemented since the beginning of the financial crisis is simply a reckless substitute for transparency.

It is reckless because complex rules and regulatory oversight failed in the run up to the current financial crisis and there is no reason to believe they won't fail again.
The slow progress has prompted some countries to take unilateral measures as trust among supervisors over banks is still not strong enough. 
The European Union is annoyed with U.S. plans to impose heavier capital requirements on foreign banks as a safeguard to keep its taxpayers off the hook if they get into trouble. 
Britain has also been criticised for putting pressure on foreign banks to become fully fledged subsidiaries and thus required to hold a pot of capital and cash locally. 
Carney said nationally focused policies could reduce global growth by hindering efficient allocation of capital and liquidity. 
"Reforms that strengthen the resilience of the national and global system can also prevent regulatory arbitrage, reduce contagion and reduce incentives to ring-fence national systems," Carney said.

Transparency is the ultimate reform in that it strengthens the resilience of the national and global financial system, prevents regulatory arbitrage, eliminates contagion and eliminates the need to ring-fence national systems.

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