With a hat tip to FT Alphaville and their beefier web servers…
Quick take on stability aspects: well trailed moderation (or pusillanimity) in that it preempts radical breakup; tougher capital requirements than Basel III, plus CoCos; leaves liquidity regulation to Basel, and shadow banking regulation to the Financial Stability Board.
The main stability-related points of the report are summarized below.
As trailed, no bank breakup:
Banks must have greater loss-absorbing capacity and/or simpler and safer structures. One policy approach would be structural radicalism – for example to require retail banking and wholesale and investment banking to be in wholly separate firms. Another would be to be laisser-faire about structure and to seek to achieve stability by very high capital requirements across the board. The Commission, however, believes that the most effective approach is likely to be a complementary combination of more moderate measures towards loss-absorbency and structure.
The Commission buys the argument that there is an advantage to universal banking, and that seems to be enough to kick the idea of a full breakup into the long grass:
As to the form that separation might take, a balance must be struck between the benefits to society of making banks safer and the costs that this necessarily entails. Full separation – i.e. into separate entities with restrictions on cross-ownership – might provide the strongest firewall to protect retail banking services from contagion effects of external shocks. But it would lose some benefits of universal banking. On the other hand, it is doubtful that separability of operational systems, though desirable for effective resolvability, would itself be enough.
This is not obviously a good tradeoff. You don’t have to be a radical to see the potential problem:
Under existing arrangements, the big banks make bets using your money – which they profit from if they work and which you pay for if they don’t. “Ring-fencing” allows this to continue precisely because “Chinese walls” break under pressure.
The IBC’s solution relies too much on sophisticated regulation – ignoring the reality that regulators will be out-smarted by better-paid practitioners.
There will always be huge shareholder pressure for universal banks to boost profits at the expense of a sound commercial banking core. And ring-fences are anyway nonsense, as senior executives will have a legal obligation not only to maximize profits, but to know what’s going on across the entire group. That’s why nothing less than total separation will do.
Another of the banking lobby’s myths is that if a “ring-fenced” investment bank gets into trouble, it can fail without harming retail depositors within the same bank. That assumes the ring-fence hasn’t already been circumvented, a deeply unwise assumption, and is anyway not the point.
The point is that, while investment banks are needed to finance all kinds of business activities, their more speculative antics are now carried out on such a scale that they have a serious impact on us when they go wrong.
Perhaps there is more support for the Commission’s view in the meat of the document; in the meantime, the Telegraph makes more sense to me.
What about the political aspects? What will the Lib Dems (junior coalition partners) make of this? Oakeshott, former Treasury Spokesman, might give a clue:
Radical reform of the banks is right at the heart of the coalition agreement and a key reason why Nick Clegg, Vince Cable and the rest of us signed up with the Tories. It’s high noon for the coalition if we bottle out after Vickers’ final report.
Well, it could be that the bottling out’s already happened. So what now for the Lib Dems?
Capital: 10% equity capital; much more than Basel currently proposes, with a layer of (most likely) CoCos too:
On equity capital, an important step is the 7% baseline ratio of equity to risk-weighted assets in the Basel III agreement. The international community is considering augmenting this for systemically important banks. In the Commission’s view, the available evidence and analysis suggests that all such banks should hold equity of at least 10%, together with genuinely loss-absorbent debt. That would strike a better balance between increasing the cost of lending and reducing the frequency and/or impact of financial crises.
The Commission’s view is that the 10% equity baseline should become the international standard for systemically important banks, and that it should apply to large UK retail banking operations in any event. Subject to that safeguard for UK retail banking, and recognising that wholesale and investment banking markets are international, the Commission believes that the capital standards applying to the wholesale and investment banking businesses of UK banks need not exceed international standards provided that those businesses have credible resolution plans (including effective loss-absorbing debt) so that they can fail without risk to the UK taxpayer.
A final comment on regulatory philosophy: a week or two ago I reduced a hardened capital markets trader to helpless laughter by suggesting, not entirely flippantly, that rather than racing to the bottom on light touch regulation, the UK might gain an advantage as a financial centre from visibly tougher regulation. I suppose he is chuckling again now:
An important consideration for the Commission is how reforms to UK banking could affect the competitiveness of UK financial services and the wider economy. The Commission’s current view is that the reforms of the kind contemplated in this Interim Report would support the competitiveness of the economy and would be likely to have a broadly neutral effect on financial services.
First, they would affect a relatively small proportion of the international financial services industry based in the UK. Second, improved financial stability should be good, not bad, for the competitiveness both of the financial and non-financial sectors. The costs and consequences (including for taxation) of financial crises make countries that suffer them less attractive places for international businesses to locate. More resilient banks are therefore central to maintaining London’s position as a leading global financial centre, not a threat to it. So while a further domestic taxpayer guarantee might be to the advantage of some UK banks in international competition, it would be a fiscally risky subsidy without justification. In any case, the location decisions of banks are affected by a wide range of factors that go well beyond the issues that the Commission has been asked to consider.
That’s great but pre-empting the breakup option doesn’t follow through on this perspective as vigorously as one might expect. Right now this looks like more lip service.
More on all of this in a day or two when I’ve had a proper chew.
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While feigning to recognize the benefits of narrow banking, the commission triangulates back to traditional macro-regulatory measures of Chinese Walls that are see-through and crash easily under pressure as well as some higher capital requirements.
Here’s an idea.
Do away with capital requirements and do away with shadow banking.
Full-reserve banking is the basic method for bringing true stability to the banking ‘profession’.
Monetization, so to speak, of bank credits is necessary to make this happen, but once completed, there is no need for radical banking regulation.
Bankers will be lending only REAL money for which THEY are paying rent.
Shadow banking – where private entities create financial instruments denominated in their national currency – repayable from the national economy – must come to an end if we are ever to regain control over national monetary systems.
A new era of true investment trusts, again where all money belongs to someone prior to its investment, and none is leveraged out of financialized ‘thin-air’, would also eliminate the need for not only super and supra macro-prudential financial services regulation, it would force bankers into being equal-footed, honest businessmen worthy of trust with our money.
The needed method for creating new money under such a system, as well as the transition to full-reserve banking, are laid out in Congressman Dennis Kucinich’s proposal here.
http://kucinich.house.gov/UploadedFiles/NEED_ACT.pdf
Let the government create the national currency and let bankers get back to banking.
All as was called for by Friedman, Fisher, Simons, Douglas and many others, back when monetary stability wasn’t some esoteric ‘academic’ riddle.
Let the government create the national currency and let bankers get back to banking. joebhed
What if AMC had the right to issue movie tickets for all its competitors? What if Kroger had the right to issue store coupons for Albertson’s and the rest of Kroger’s competitors? What if Ford had the right to issue GM stock?
Movie tickets, store coupons and common stock are all money forms and counterfeiting them is forbidden. Then why is government money legal tender for private debts? Is that not counterfeiting too?
We need separate government and private money supplies, not just one government enforced monopoly money supply for all debts, public and private.
Jesus gave us this solution 2000 years ago in Matthew 22:16-22.
We ignore it at our peril.
Not speaking to the present private Fed as creator/enabler of this nation’s monies, in the national economy, the government is not a competitor to private banks.
Banks make money by making loans. The government has not need nor ability to compete with banks.
We believe, and as legally constructed, Government is responsible for providing for the public good, including the monetary system. Thus whenever the private banks F it all up, everyone runs to the government for a fix.
I believe in the existence of the national economy, of our national monetary system and a national currency for all transactions within that economy. Why not?
If adequate money exists and ALL bankers have access to ALL that money upon its existence, then why do we need private bank money?
Bankers playing with real people’s money need to be just as competitive, if not more so, as if they had their own money.
Not speaking to the present private Fed as creator/enabler of this nation’s monies, in the national economy, the government is not a competitor to private banks. joebhed
True – currently the government is an enabler of the banks. The banks extend “credit” in the government enforced monopoly money supply which is legal tender, in practice as well as law, for all debts, including private ones. Thus the government enables private counterfeiting by the banks. With genuine private money alternatives, the population could escape that theft by inflation from either the banks or the government if it overspent relative to taxation.
Banks make money by making loans. joebhed
Literally! New, temporary money (“credit”) is created as loans are made.
The government has not need nor ability to compete with banks. joebhed
True but even with the ability to create money ex nihilo, government must nevertheless spend wisely less its money lose purchasing power.
We believe, and as legally constructed, Government is responsible for providing for the public good, including the monetary system. Thus whenever the private banks F it all up, everyone runs to the government for a fix. joebhed
The private banks will always screw up with any form of government backing, including a government enforced monopoly money supply for all debts. Why? Because usury itself is unstable and thus will always require either debt forgiveness, bankruptcy or bailouts.
I believe in the existence of the national economy, of our national monetary system and a national currency for all transactions within that economy. Why not? joebhed
Because it is contrary to Scripture, history, sound principles, and logic. It is government support for usury since the population cannot escape it via private money alternatives. Government money must only be legal tender, in practice as well as law, for government debts, not private ones.
If adequate money exists and ALL bankers have access to ALL that money upon its existence, then why do we need private bank money? joebhed
We do not need “private bank monies”; we just need private monies. Period. Common stock is a private money form that requires no borrowing or lending, much less usury.
Bankers playing with real people’s money need to be just as competitive, if not more so, as if they had their own money. joebhed
Conventional banking becomes obsolete with genuine liberty in private money supplies. Who would rent someone else’s money supply when they might create their own interest free?
Full-reserve banking is the basic method for bringing true stability to the banking ‘profession’. joebhed
So I used to think. But usury is unsustainable even with 100% reserves. The debt grows at an exponential rate that the real economy cannot keep up with.
Long before fractional reserve lending was invented, periodic debt forgiveness was commanded in Deuteronomy 15.
The solution required is more fundamental than 100% reserves. The true solution is to limit government money to its proper role, taxes and fees, not private debts.
Full-reserve banking provides stability to the banking and money system by removing the cyclicality of the boom-bust parade that is caused by multiplying(boom!) and then dividing(bust!) the reserve factors of the banks. It does not solve the usury problem.
Having an adequate (sufficient to achieve national GDP potential) money supply is the greatest anti-usury policy tool. Banks will be utilizing the savings of their depositors to meet the demand for loans. Adequate money means downward pressure on interest rates.
Please explain how having dual currencies will solve the usury problem.
Thanks.
Full-reserve banking provides stability to the banking and money system by removing the cyclicality of the boom-bust parade that is caused by multiplying(boom!) and then dividing(bust!) the reserve factors of the banks. joebhed
Fractional reserves are certainly crooked and should be strictly limited by true market forces but a complete abolition would be impossible to enforce, I would bet. And yes, fractional reserves amplify the boom-bust cycle but usury itself is the fundamental cause since the debt grows faster than the real economy.
It does not solve the usury problem. joebhed
Which is why we need separate private money supplies that do not require usury such as common stock.
Having an adequate (sufficient to achieve national GDP potential) money supply is the greatest anti-usury policy tool. joebhed
No it isn’t. Banks loan out money for usury. To have banks is to have usury.
Banks will be utilizing the savings of their depositors to meet the demand for loans. Adequate money means downward pressure on interest rates. joebhed
Unwise government spending would lead to price inflation and thus rising real interest rates. Inadequate government spending or excessive taxation would lead to a money shortage which would again cause rising real interest rates.
Please explain how having dual currencies will solve the usury problem.
Thanks. joebhed
Not dual currencies, there would be 1 (or 51 if the States decide to issue their own fiat) government currencies and any number of private currencies.
But to answer your question:
1) There are private money forms that do not require usury such as common stock.
2) Why would anyone rent a money supply from a bank if he might create his own, interest free?
3) Real interest rates would rise without government support for fractional reserves. Corporations might be forced by market pressures to spend their common stock as money in lieu of borrowing.
I understand the basic idea of capital requirements
(minimum capital required to operate, by th rules)
being tied to risk-weighted assets.
Lately, I’ve read about VaR (Value at Risk) some.
My understanding is that, when the VaR for a
portfolio/fund/etc. is done by trading days (as opposed
to week, two-week or longer periods), what’s called
VaR is either
(a) the amount of loss that will be surpassed for
“precisely” 5% of trading days (i.e. one day
in twenty). OR
(b) the amount of loss (in the fund, etc.) that will
be surpassed for “precisely” 1% of trading days
(i.e. one trading day in every 100).
The latter figure is larger (greater loss) than the
former.
Nassim Taleb has argued against VaR as a
meaningful gauge of safety and stability in
“The Black Swan” and elsewhere. I think that
even if VaR in the fat tails at the 5% or 1%
is accurate, with 250 trading days a year,
10 years comprises 2500 trading days, and the
amount of loss exceeded on “precisely” 1 day in 2500,
or in other words for 0.04% of trading days, is
much more relevant to what might transpire in “bad”
market conditions such on some days in 2007 or 2008.
The problem is that, as reported, VaR appears to
say nothing about potential losses once in 1000, 2500
or say 5000 trading days.
Might the Independent Commission on Banking have something
to say about Value at Risk in either its Interim Report
or its Final Report?
If I may say so, there’s an article by Pablo Triana
readable on-line from futuresmag.com entitled
“VaR: The number that killed us”. The piece was
published on 12/1/2010.
On page 2 of the on-line version, Triana reports some
“VaR exceptions” data for 2007 and 2008 at some of the
largest banks. VaR values are always give for some
confidence level, generally 95% or 99%. At a 99%
confidence level, a specified model “says”/”predicts”
that only for 1% of trading days will the loss on
a portfolio or fund exceed the value given by the
model for a 99% confidence level. For a whole year
of 250 trading days, one expects 2.5 VaR exceptions
on average at the 99% confidence level. Pablo Triana
gives us the number of VaR exceptions for UBS and
a few other mega-banks in 2007 and 2008.
Commissions are an establishment mechanism, not to find solutions, or get at the truth, but to re-inforce and validate the status quo while giving the rubes the impression that some kind of real critical process has occurred. We have all heard the admonition to trial attorneys never to ask a question they don’t already know the answer to. Well, those who create commissions have a similar philosophy.
There are numerous ways in which a commission’s output can be pre-determined and influenced. First, it can be limited simply by how its mission is defined. Look at this, don’t look at that. Second, there is the choice of who sits on the commission. If you fill the principals slots with establishment types, you are going to get an establishment conclusion. The more sleepers you can get onboard, the more you can steer the commission’s direction and conclusion. Third, resources. If you can limit time and money, you limit the ability of the commission to actually have the means to do anything. Fourth, the investigative staff. This is really where the rubber meets the road. Do the investigative staff want to investigate? Can they even if they wanted to? Will the principals listen to them? Fifth, I don’t know how this works in the UK but here you can tell a great deal about a commission simply by knowing if it has subpoena power, and if, in fact, it uses that power. A basic rule is no subpoena power or no use of subpoena power equals no credibility.
Characterizing the UK commission as “independent” seems like sloppy branding. It is too insistent and draws attention to an issue, from an establishment point of view, best left unfocused on. On the other hand, maybe the commission’s purported “independence” is meant to better sell its conclusion to the rubes.