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Not all regulation is good (there I said it)

December 5, 2011

Not all regulation is good.
Deregulation is often blamed for the financial collapse (see the OTC derivatives market) but certain regulations themselves were also to blame.
Take for example the Basel banking rules which require commercial banks to hold a specified amount of capital against certain kinds of assets. Under these rules in 2007 banks and investment banks were required to hold 8% capital against corporate loans, 4% against mortgages and 1.6% against mortgage-backed securities. (Capital is primarily equity, or cash). The riskier the asset the more capital banks needed to hold to secure against losses. The result was financial institutions held substantially more holdings of mortgage-backed securities – due to the lower capital requirements. Hmm, that didn’t turn out so great as banks and other financial institutions were encouraged by the Basel rules to hold the worst possible assets which collapsed with the U.S. housing bubble.
Banks are also incentivized to own sovereign debt – and look what’s going on in Europe and you wonder why Euro banks are doomed?
Think that can’t happen here??? US treasuries won’t be risk free for long me thinks…
To create financial stability regulators should encourage asset diversification (penalize concentration) advocate fair value accounting and limit the amount of leverage in the system. I don’t like the idea of governments dictating which assets financial companies should own.
No sir, I don’t like it.

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3 Comments leave one →
  1. December 6, 2011 2:35 am

    You are sailing into semantics territory.
    Although individual regulations themselves may be bad, it doesn’t mean that the system for regulation is bad or not needed. I’m tired, I’ll try expounding tomorrow.

  2. debaseface permalink
    December 6, 2011 6:40 am

    BBG this morNing http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2011/12/05/bloomberg_articlesLVR7P007SXKX.DTL
    “It’s difficult to see how the rules can come in in their current form,” said Edward Chan, a banking lawyer at Linklaters LLP in London. “On the one hand, they require banks to hold euro-zone sovereign debt to meet liquidity targets, yet holding those securities pushes them further and further toward insolvency.”

  3. December 11, 2011 9:58 am

    I don’t think there’s anyone out there (who’s not crazy) that things ALL regulation is good.

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