I have been asked several times for a summary of what I think about the changes to the US banking system mooted by the Obama administration. Apart from not actually addressing the root cause of the collapse I believe the suggested changes will just make the whole thing more likely to recur next time the economy downturns.
The root cause, by the way, was over-lending by small commercial banks for mortgage purposes, aided and abetted by Fannie Mae, Freddie Mac, US regulations and bigger US banks that did not look too closely at some of their risk models in pursuit of short-term profits.
The best summary I have heard, though, and one that is close enough to my own views, is this one from the BBC, which I heard driving home yesterday. Give it a listen and then think about it.
2 comments
26 January, 2010 at 13:07
nzriskmanager.com
what about the likely basel changes, including a leverage ratio and tighter definition of tier 1 capital. Madness !
26 January, 2010 at 17:38
Andrew
The leverage ratio was a bad idea long before the GFC and it has not improved with time.
To me at least the whole premise of the leverage ratio is wrong – it means that once you have made your bank reasonably safe then no matter what you do to make it safer you will receive no capital benefit from making it safer at all – i.e. you may as well make it a bit riskier. Not a good idea.
The (mooted) changes to the tier 1 definition are interesting, as are the changes to the liquidity calculation methods. I am reviewing these and will put a full post together on them when I have an hour or so.
Given the amount of work on at the moment, though, it might take a little while.