Wednesday, July 20, 2011

The irrelevance of "bank resolutions" and "surcharges"

One should ignore the consultation paper issued by the FSB (Financial Stability Board) on how the large banks could be dissolved in case of a crisis.

Note that the FSB likes to avoid using the word "dissolved", and prefers to use the weasel word "resolved" - a very good instance of modern American double speak.

But why should the FSB paper be ignored? Because its implementation is set so far in the future that it is irrelevant to the problems that are going to engulf the global economy well before then.

Equally irrelevant is the FSB scheme to apply a "surcharge" starting somewhere between January 2016 and the end of 2018 to twenty eight "globally systemically important banks" (G-SIBs), identified on the basis of "scores" that may be fixed some time by January 2014 which, in turn, will enable national laws to be framed by something like January 2015. In any case, the scheme requires the approval of the G20 - and if that does approve the scheme at its summit in November, the scheme will not become fully effective till the end of 2018 (!). So we can be sure that the FSB, the Bank for International Settlements and the G20 anticipate no crisis for the next seven years!!!

Anyway, why is this "surcharge" scheme irrelevant? Not merely because the FSB is not going to "charge" anything (let along "surcharge" anybody) - it is only going to require these 28 big banks to hold slightly more capital than they do at present (and that is what is called, in inflammatory language, a "surcharge").

No, the reason why the "surcharge" is irrelevant is because there is no evidence that holding capital of between 1 and 2.5% more than that currently required is going to "stabilise" these banks at all.

Recall that UBS (the bank for which I worked then) had MORE than that as an additional capital buffer at the time it ran into trouble due to the global crisis.

I cannot argue that the extra buffer did not help at all, but the fact remains that the extra buffer did not prevent UBS from getting into a desperate situation where the combined efforts of the Swiss government and Singaporean and other wealthy institutions were required to rescue it.

Has the FSB has done any homework on why, at the time of the crisis, UBS was not helped by having a buffer of MORE than that they are now thinking of requiring of these G-SIBs? Not to my knowledge....

Nor am I aware of any other research on which the so-called "scores" are based, and which determine the banks are to be classified as G-SIBs. The score consists equally of five factors: size, cross-border activity, interconnectedness, complexity and substitutability. The five factors do make sense. But does it make sense to weight them all equally? Who knows?!

Worse, no one seems to care, in the rush to placate two opposed lobbies: on one hand, taxpayers who continue to bear the liability of bailing out these massive banks when they fail, and on the other hand, the owners and managers of these banks who resist having any additional capital while continuing to have state guarantees in exchange for paying the state absolutely nothing.

Ahy 28 banks rather 20 or 30? Or 10 or 50? Again, the number is based on no research. Merely political fudgery.

To console us, we are told that a wider sample of 73 large banks will be kept under review. Is 73 some sort of magic number? Or is the number based on some research? No, it isn't. Political fudgery again.

BTW, the FSB is anxious for us to know that a one percentage point increase in capital at the big banks will dampen economic growth by 0.17 to 3.17 basis point per year over a four-year implementation period. Note that the FSB does not tell us whether the capital increase will make for any stability.

Why is the FSB so keen to tell us the effect of its "surcharge" on growth (something which is not its responsibility)? Why is it not at all keen to discharge its responsibility and tell us the degree to which its proposals will actually stabilise the financial system? Because it can calculate the former (or have it calculated), while it has no means of calculating the latter. The FSB simply does not know and cannot know whether its proposals will make a blind bit of difference to global financial stability.

That is why the FSB and all its works so far are a sham. Sphere: Related Content

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