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Mervyn King: Basel Ill Is Too Soft.

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http://www.bbc.co.uk...siness-11624994

Mr King said banks would need to rely on "much, much more equity" to

finance risky investments Bank of England Governor Mervyn King has attacked the

'absurd' level of risk taken on by banks in a speech. He called the banks'

reliance on short-term debt to meet funding needs in 2008 an "accident waiting

to happen". He said that, in future, banks must be forced to rely much more on

equity to finance their risky activities. His comments raise the prospect that

big UK banks will be required to hold significantly more equity than new

international rules require. In order to do this, the banks might have to issue

new shares, pay out less profits as dividends, or ration new lending more

tightly.

In September, the Basel international committee of bank

regulators raised the minimum ratio of equity that banks must hold to absorb

losses on loans and other risky investments from 2% to 7% of assets. However,

the committee said that even higher ratios were to be agreed for the biggest

banks whose failure would pose a risk to the financial system. And individual

regulators - such as the Bank of England - are free to set even higher standards

if they choose...

Mr King said that the new Basel minimum capital ratios

were inadequate to address the problem of banks that are too big too fail, such

as Barclays, HSBC and RBS. Such banks, he said, enjoy an implicit guarantee,

which gives them an incentive to take on excessive risks. He also said that the

coalition government's proposal for a bank levy - which is expected to raise

£2.5bn a year - would be nowhere near enough to cover the losses of a future

financial crisis. "The balance sheets of too many banks were an accident waiting

to happen," he said, referring to the 2008 financial crisis. "For all the clever

innovation in the financial system, its Achilles heel was, and remains, simply

the extraordinary - indeed absurd - levels of leverage represented by a heavy

reliance on short-term debt," said Mr King.

"The broad answer to the problem is likely to be remarkably simple. Banks should be financed much more heavily by equity rather than short-term debt. Much, much more equity. Much, much less short-term debt."

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He makes no mention of the contribution of all the lies and fraud and more fraud and lies etc in destabilising the system (only "risky activities"). So it looks like fraud and lies are ok but it must have more equity funding and less short term debt :blink:

Almost like saying don't get caught next time.

Edited by billybong

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Those sound like wise words to me. Perhaps savers should have an equity stake too (ie. no deposit guarantees and a chance of losses), like Kotlikoff's LPB suggests. In fact, as he mentioned the latter too (in the other post), this may also be what he is angling for.

The bottom line is: the risk needs appropriating to the savers and investors, not the taxpayers.

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Those sound like wise words to me. Perhaps savers should have an equity stake too (ie. no deposit guarantees and a chance of losses), like Kotlikoff's LPB suggests. In fact, as he mentioned the latter too (in the other post), this may also be what he is angling for.

The bottom line is: the risk needs appropriating to the savers and investors, not the taxpayers.

You need to distinguish funding of normal loan operation vs gambling operation - so separate type of accounts will more or less do the job.

But then does that means that 50% of staffs at FSA/BoE will be out of jobs ?

Mervy is pretty soft too... charge them just 1.5% overnight if they run into trouble. Base + 5% on discount window will make sure bank behave much more carefully

But then this is from a gentleman who advocate inflation, without monetary stability, then a 'non interest bearing segregated saving account' will probably attract no taker's either.

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You need to distinguish funding of normal loan operation vs gambling operation - so separate type of accounts will more or less do the job.

But then does that means that 50% of staffs at FSA/BoE will be out of jobs ?

Mervy is pretty soft too... charge them just 1.5% overnight if they run into trouble. Base + 5% on discount window will make sure bank behave much more carefully

But then this is from a gentleman who advocate inflation, without monetary stability, then a 'non interest bearing segregated saving account' will probably attract no taker's either.

Better still, do away with central bank rates and let the market decide, based on risk, as LPB promotes. Zero bound interest rates and risk free deposits don't work - you just end up with growing imbalances.

IMO, Mervyn has to tow the line most of the time, but he does seem to realise that the system he has to manage is flawed.

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You need to distinguish funding of normal loan operation vs gambling operation - so separate type of accounts will more or less do the job.

But then does that means that 50% of staffs at FSA/BoE will be out of jobs ?

Mervy is pretty soft too... charge them just 1.5% overnight if they run into trouble. Base + 5% on discount window will make sure bank behave much more carefully

But then this is from a gentleman who advocate inflation, without monetary stability, then a 'non interest bearing segregated saving account' will probably attract no taker's either.

That implies the FSA did a job?...Which I refute! Seem's they were in charge when it all went pony, why they still exist at all is beyond a joke...the most pointless Quango going.

Overseer of unfair interest/bank charges, Negative real interest rates and miss selling of PPI...Oh and pensions (but that fooker hasn't even woken up yet)

Sure post "Credit" event they wake up and nail a few obvious targets, while the tax payer bails out the industry they were created to regulate...To the tune of "BILLIONS" of pounds! and we endure the biggest public spending cuts since WWII ....WAY TO GO FSA!

Where the hell where they when lending standards went down the pan? 4x Joint salary I/O mortgages with, self cert income and no repayment method

Luckily they can hide behind that old lie...it wasn't me guv..it was "The System", no one is responsible...just the "Frame work" that was at fault....KER-CHING!

NO wonder the bright ones sought early gold plated retirement....Much better that than, the hang man's nose they deserve!

Edited by Yoss

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As for depositors savings if they are now (after the crunch) going to be used to help to subsidise the banks failure through very poor to negative returns then savers returns during the boom should have been significantly higher to reflect the profits the lenders were making and the riskier activities of the lenders. The savings rates before the crunch shouldn't have just been based on the old banking system savings rates.

And because of that pre-crunch/post-crunch symmetry savings should also be guaranteed during the bust.

As it is interest rates on savings were relatively meagre before the crunch (meagre given the hand over fist profits the banks were making by offloading their risks through derivatives etc) and now after the crunch they are downright abject. No fairness symmetry or symmetry of returns.

And as it is when are savers going to be compensated for having to subsidise the banks through the current crisis (as well as subsidising them through the boom for that matter).

Edited by billybong

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  • 140 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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