The US 2008 financial crisis was born April 28, 2004 – and different bank capital for different assets are worse than too little or too much bank capital.
Sir, I must refer to Janan Ganesh’s “Political distemper preceded the financial crisis” August 30, in order to make the following two comments:
1. “A financial crisis that was experienced as a fragmented chain of events is being commemorated as just one: the fall of Lehman Brothers, 10 years ago next month.”
That is only because the truth shall not be named. In the case of the United States, that crisis started on April 28, 2004 when the SEC decided that the supervised investment bank holding company ("SIBHC"), like Lehman Brothers, “would be required periodically to provide the Commission with consolidated computations of allowable capital and risk allowances (or other capital assessment) consistent with the Basel Standards."
When the Basel standards approved in June 2004 included allowing banks to leverage a mind-boggling 62.5 times with any asset that have been assigned by human fallible credit rating agencies an AAA to AA rating, or had been guaranteed by an AAA rated corporation like AIG, the crisis began its construction. That in the European Union the authorities also included allowing banks to lend to sovereigns like Greece against no capital at all would only worsen the explosion.
Oops! The following part had nothing to do with Janan Ganesh, but all with Lex's "Bank capital: silly old buffer"
2. “Debates over bank capital resemble tennis rallies… On one side of the net you have the big global banks. They say they have plenty of capital and that forcing them to operate with more is a restraint on trade. Pow! On the other side are the regulators, who say more capital is better because you never know what losses you may have to absorb. Thwack!”
But there are some few, like me, who argue that much worse than there being much or little capital, is that there are different capital requirements for banks, based on the perceived risk of assets. Riskier, more capital – safer, less capital. In tennis terms it would be like judges allowing those highest ranked to be able to play with the best tennis rackets, and the last ranked to play with ping-pong rackets. And of course that distorted the allocation of bank credit.
Populism? What’s more populist than, “We will make your bank systems safer with our risk-weighted capital requirements for banks”?
@PerKurowski
Posts
