Saturday, March 8, 2008
Don Quixote's Regulatory Quest
"The complex and ongoing collapse in the US securities markets, and the extraordinarily expensive demise of Northern Rock in Britain, signify gross failures of banking regulation on both sides of the Atlantic. ... However, the major international banks regarded the 8% capital requirement imposed by Basel as impossibly onerous, and believed that the Accord unecessarily restricted their move into profitable new areas of finance. ... [T]he new capital standards haven't [worked]. The risk management methodology blessed by Basel II, that of Value-at-Risk, has been found to be an excellent way of measuring risk--except when markets are actually risky. ... The system of financial regulation needs to be completely reworked, No longer should the behemoths of the market be allowed to give themselves greater privileges than medium sized banks. ... Instead, all assets for which a bank is responsible should be carried on its balance sheet, as should the market value of all liabilities, contingent or otherwise, even if they are offset by corresponding assets. Strict regulations should be imposed on maturity and currency mismatches, and trading in equities should not be permitted by institutions whose deposits are guaranteed. No exceptions should be permitted to these regulations", my emphasis, Martin Hutchinson (MH) at http://www.prudentbear.com/, 3 March 2008.
I agree with MH's diagnosis of the problem, but believe his solution, better regulation, wil fail. The big banks will evade any regulation. They will hire the regulators, creatively misinterpret the regulations, etc. By law, deposit taking institutions should be prohibited from making any but consumer loans. I conclude the only thing big banks make money from is consumer loans anyway. The Federal Reserve Act should be repealed and the banks' backstop ended. See also my 12 December 2007 and 13 January 2008 posts.