Discuss Preventing the next financial crash in Economics on The Army Rumour Service; I firmly believe Basel III and Solvency II sets us up for a a far worse crash than the previous one. Simply because the regulations have become far more prescriptive and while backwards looking appear ...
I firmly believe Basel III and Solvency II sets us up for a a far worse crash than the previous one. Simply because the regulations have become far more prescriptive and while backwards looking appear great, they are not very forwards looking. Leverage caps seem prudent and perhaps the best area they've touched is the cleaning and increasing of common equity requirements. Still, not forwards looking and biased (0% r.w. govies etc.)
Why did CDOs fly out of the door? Risk-weighting and regulatory "arbitrage", the same with off-balance sheet SIVs etc.
More than ever the risk-weightings attributed to existing asset classes skews banks' businesses away from what they would naturally do for prudent, profit maximization.
My solution? Start simple:
1) A fixed risk-weighting for all assets of 5%;
2) Full disclosure of net and gross bucketed market positions every quarter, 3 months delayed.
This would result in full transparency, albeit delayed for market sensitivity, for shareholders to make informed decisions i.e. self-regulate to an extent, would increase competition and prevent distortions to banks' business. You would know exactly what kind of bank you are investing in.
Well more transparency seems key and Basel III seems like an ineffectual half measure but I must admit I don't understand the mechanics.
I can't help thinking the sheer scale of our Byzantine institutions is a problem and given financial history a lot more attention should be given to robustness in failure as they are liable to fuck up big time however they are regulated by national governments which appear to have increasingly limited practical sovereignty in these matters.