One question I get asked about reasonably regularly (or at least I did while anyone was doing any more than firefighting) is “What’s next?”. Where are we going next with global bank regulation?
Having had a good look at the recent problems, I would have thought the answer is fairly obvious. Basel II said a lot about capital minima and regulatory oversight of them, but precious little about liquidity. If we assume that the magic number is still 8 I can see little more that can be done in terms of capital – the calculation of capital for the Advanced banks is pretty much a done deal and there is enough flexibility to accomodate many changes to the calculation1 methodologies used.
The only other real scope for change I see is the way the ratings agencies’ ratings are used in the calculation of the Standardised methods – but I cannot see this as being any more than tinkering around the edges.
The major changes, then, are likely to affect the way that liquidity is measured. Other than abandoning fractional reserve entirely2, what suggestions would everyone make for the way that liquidity should be measured and enforced3? The regulators are currently thinking of how to go about putting together a global scheme. Let’s see if we can come up with a workable methodology. If you like the one used in any particular jurisdiction, feel free to link to it.
Personally, I think the Australian method is not too bad, with a “Standardised” method of calculating it using holdings of certain, defined, “highly liquid” assets (in this case with a magic number of nine), or and “Advanced” method using modelling at the discretion of the regulator. It largely mirrors a Basel II-type framework, and allows for innovation at the same time.
1. Although it is in no way perfect.
2. You know who I am talking about.
3. I should add that it is my personal belief that this should be left alone, but I do not think this is a realistic option at this point.