PrefBlog

Donato Masciandaro writes an opinion piece on VoxEU: Basel 3: Supervising the credit giants with progressive capital ratios:

The too big to fail rule therefore represents an authentic paradox – in the presence of risk of systemic crisis, the rule must be temporarily adopted to prevent the crisis from actually worsening, but if it is not credibly revoked, it pushes the system towards an unstable and inefficient oligopoly.

But can the too big to fail rule be revoked after the financial crisis ends? It may be difficult since the law has never been written, but it is always imminent in oversight procedure. But if government insurance against the insolvency of large banks is difficult to abolish, the government could try making them pay. Defining the correct plan for such a distinctive kind of insurance would not be simple, but the current situation could certainly be improved upon. Now, large banks could reasonably believe that they are covered by a subsequent implicit insurance in case of an insolvency risk. Banks do not pay a corresponding initial premium, however, as the prudent regulation plan does not mention bank size, at least from this point of view.
…
New ideas are needed: capital coefficients that, equal to other risks, consider the “irresponsibility risks” that could increase bank sizes out of proportions, for example. Thus, non-proportional capital coefficients which are progressive in relation to the activity volume are needed, possibly divided into size groups. In order to “put a price” on government insurance in favour of credit giants, non-conventional regulatory solutions need to be explored, striving to remain in line with the foundation of a market with prudent regulation. It is not simple, but it would be better than pretending that the problem did not exist.

I support the idea; particularly if it is paired with the idea of weighting risk-weighted-assets differently according to either the “trader” (investment bank, dealer) or “investor” (regular bank) regime chosen by the entity.

Action today was dominated by settlement of three new issues (bank fixed-resets), each of which made it into the volume tables, unsurprisingly. PerpetualDiscounts were off.

This entry was posted on Wednesday, January 14th, 2009 at 9:58 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.