Economics

Reason Writers Around Town: Anthony Randazzo on Reforming International Banking

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Writing at the finance site Minyanville.com, Reason Foundation Director of Economic Research Anthony Randazzo explains why the new international banking rules established in Basel, Switzerland are unlikely to prevent another financial crisis. As Randazzo writes:

While the overall new design for capital requirements is well-intended, and might be more prudent than previous iterations of international banking standards, the Basel III Accord misses the main lesson of the global financial crisis: Over reliance on regulatory structures decreases incentives for financial institutions to watch their own backs.

Read all about it here.

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  1. While the overall new design for capital requirements is well-intended, and might be more prudent than previous iterations of international banking standards, the Basel III Accord misses the main lesson of the global financial crisis: Over reliance on regulatory structures decreases incentives for financial institutions to watch their own backs.

    “While making everybody wear body-wide protective equipment may be a prudent thing to do, it may lead to people becoming more daredevilish.”

    Idiots who argue for more regulations usually do not see beyond their noses: people with no more protection than their clothes still do not walk into the path of incoming traffic as a matter of routine, so why say that people [and thus, the market] cannot regulate itself?

    Eleutherophobic bastards – all of you!

  2. I would go beyond that and say that regulatory rules can actually create the very instabilities they’re designed to avoid.

    It was regulators who decided that MBS should carry a lower risk weighting than whole loans in a bank’s portfolio. Because regulators decided that MBS were safe, many banks overinvested in MBS.

    “Invest in that shit over there!”

    System crashes.

    “You greedy bastards should have known better than to invest in that shit over there!”

    Lather. Rinse. Repeat.

    1. And let me just point out that the whole valuation problem around MBS and other derivatives has not gone away. At all.

      As I understand it, banks are allowed to carry these on their books at notional value because they are unmarketable.

      Savor that for a moment: You’ve got paper so rotten that it can’t be sold, so you get to carry it at full face value.

      There’s a reason why banks are still failing at an appalling rate, why more banks than ever are on the FDIC watch list, why the FDIC is shortly going to burn through the three years of advance premiums it forced the banks to cough up, and Basel III does absolutely nothing about it.

  3. NYT Link to story here:

    …But decisions made at a brief meeting on April 28, 2004, explain why the problems could spin out of control. The agency’s failure to follow through on those decisions also explains why Washington regulators did not see what was coming.

    On that bright spring afternoon, the five members of the Securities and Exchange Commission met in a basement hearing room to consider an urgent plea by the big investment banks.

    They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments. Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments….

  4. “Over reliance on regulatory structures decreases incentives for financial institutions to watch their own backs.”

    There’s that, and there’s Factoid Two: the fact that even the most highly incentivized, smartest people in the world can’t predict when the next big downturn comes with any consistency–not even when they’re standing on the brink of it!

    And all the regulators out there, who think seeing when the worm’s gonna turn is as clear as clear can be, why haven’t they already started their own hedge funds?!

    Why deprive the world of their amazing market timing expertise?! Don’t they care about people?

    Factoid Three: the economic cycle isn’t about to disappear because a bunch of regulators got together and decided to pass regulations against it.

    Factoid Four: Deregulation is the solution to financial crises. Most of this stupid regulation will disappear over the decades, once the economy starts growing robustly again.

    …but robust growth isn’t gonna come about any sooner because of regulation. Figures they’d ramp up regulation right when we needed it the least. Regulation constrains innovation–even if heavier reserve requirements, etc. might have prevented the worst of this downturn–that isn’t what’s needed now!

    Right now? What we need is leveraged buyouts. Right now? What we need is hostile takeovers. Right now? What we need is creative destruction. And we need regulators to take the gloves off of our boxers–not put ’em on.

    We’re sending our boxers into an MMA fight, and tellin’ ’em they can’t use their feet, can’t wrestle on the ground…

    Leadership in the West is so pathetic. I blame the Hippie Baby Boomers–worst generation ever.

    1. Oh, yeah? Well, double dumbass on you!

  5. Basel III is dangerously irrelevant

    What really detonated this crisis? The fact that because of the risk-weights the banks needed only to hold 20% of the basic capital requirements when investing in triple-A rated securities backed by the lousily awarded mortgages to the subprime sector. Would it have happened if the risk-weight for those investments had been 100%? Of course not!

    The fact that the risk-weights are now not even mentioned in Basel III points to its absolute irrelevance? except for that the higher, the better, the stronger the basic capital requirements for banks are, the bigger is the regressive discrimination produced by its arbitrary risk-weights.

    A visitor from outer space looking at the current financial regulations which require a bank to hold 100% of the standard capital requirement when lending to a small business or entrepreneur, but allows it to hold zero percent of that same requirement when lending to a triple-A rated sovereign like the US would most likely have to conclude that planet earth is communistic.

    One of the most worrisome consequences of the above is that we have no idea where interest rates on public debt would be absent that regulatory subsidy.

    Per Kurowski
    A former Executive Director at the World Bank (2002-2004)

    PS. Let me slip in a brief lesson on how bank regulators have become so fixated on seeing the gorilla in the room that they completely lost track of the ball. http://bit.ly/c66DLp

  6. You people are insane if you believe this bullshit.It wasnt over reliance on regulation that got us here it was the lack of regulation that is still going on right now even worse than before.
    It was the unregulated mortgage companies that started the the liars loans and ninja loans.It was the unregulated banks and derivatives markets that bundeled those bogus mortgages and sold them to the world.It was the unregulated financial products division at AIG the giant insurer that brough that down.

    See a pattern?

    Its a complete repudiation of libertarianism.

    Oh if you want to know who the culprites are….

    FRONTLINE | “The Warning”: Sneak Peek 1 | PBS

    http://www.youtube.com/watch?v=qP4d5paLECs

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