Wednesday, 28 July 2010

Banks and Basel 3: Asking kids to mark their own homework

One of my colleagues sent around a bloomberg article which stated that Westpac (the Aussie bank) had opined that the Basel 3 rules were flawed and risked constraining lenders! Wasn't it unconstraining lending that help get us into the GFC (global financial crisis for non-aussies)?

Why anyone would care what any bank thought of attempts to regulate it remains beyond me. One of the major problems of Basel 2 was that banks were allowed to use their own risk models to value assets. This is akin to asking kids to mark their own homework, one shouldn't be surprised when they report they got 100% correct.

Talk about not learning from mistakes. Hasn't anyone heard of regulatory capture?

16 comments:

bb said...

you've twice mistyped Basel.

Anonymous said...

You missed the part whereby minority shares in other financial firms are allowed to be counted as capital!

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Chris said...

James - this is quite interesting, especially when you consider that Westpac's housing book alone represents over TWELVE times their tangible common equity. We recently wrote a letter on the housing market in the Land of Oz (www.viewfromtheblueridge.com). Our estimates have losses for WBC approaching one quarter of the banks equity if housing prices were to revert to normal . . . and this is ONLY looking at the banks NEW loans written in just the past three years. Wonder what's in the rest of their book?

No wonder they aren't happy about slowing lending. Problems predictably begin to appear as growth slows.

Dan Ferris said...

James. I thought you recently wrote of a study that showed equity investors see the bulk of returns after five years of holding...does that sound familiar?

Dan Ferris said...

James, didn't you recently write about a study that showed equity investors see the bulk of their returns in holding periods of five years or more?

Do I have that right? If so, I'd love to see what you wrote, and the study, if it's available.

Jens said...

dan ariely actually tested this - students grading themselves... and most cheated!!
great to have you back! Your little book on financial behavior is awesome!

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Black Swan Insights said...

Bernanke likes to remind everyone that he is an expert on the great depression and knows how to prevent it from happening again in the US. Apparently he is also an expert on Japan and its struggle with chronic deflation following its housing bubble in the 1980's. In fact Bernanke wrote an article in 2000 titled "Japanese Monetary Policy: A Case of Self-Induced Paralysis," where he goes on to lecture BOJ officials about what they could and should have done differently in order to to avoid a deflationary outcome. He goes on to postulate that the BOJ was not trying hard enough to stimulate the economy and that 0% interest rates are just one tool to beat deflation. The Fed Chairmen even goes so far as to assert that he knows how to escape a liquidity trap caused by 0% interest rates. The reason I bring this up is because it gives people a good idea of what Bernanke's next move may be. The US is dangerously close to falling into the dreaded "liquidity trap" as deflation takes hold and monetary policy loses its effectiveness.

Here are some of his suggestions to the BOJ:
http://blackswaninsights.blogspot.com/2010/08/bernanke-explains-how-to-escape.html

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Zenchukovskiy said...

i've never heard about this. Marking your own homework is a very interesting experiment.

But when you finish school, and enter adult life, everything changes. You face the fact that other people evaluate your work. So if you want to get 'good marks', you should learn how to write a bibliography page

Dan Lee said...

If they have the rule, it is because something similar happened to them to change their opinion. It is quite interesting article that xlpharmacy wrote about it.

marine bourlier said...

It so true ... I couldn't agree more. It seems that no one is learning from its mistakes. What is the point to settle such a thing ?
I saw recently that Westpac's housing book alone represents over TWELVE times their tangible common equity.
Nonetheless what is the objective to settle this rules if it not going to work ? Maybe something change their mind