Monday, 22 December 2008
More Tools ? What the Bank Really Needs is Balls
The estimable Robert Peston writes today that the Bank of England doesn’t reckon it has the tools for the job. Apart from the obvious point that we have only one genius to blame for this, we should consider what the Bank’s Gieve says in the Pesto interview:
"we need to develop some new instruments which sit somewhere between interest rates, which affect the whole economy and activity, and individual supervision and regulation of individual banks"
Pesto himself plumps for counter-cyclical capital adequacy:
"it would have to be a mechanism to prohibit or at least discourage a lending splurge during a period of sustained economic growth, such as a formulaic stipulation that banks have to hold more capital relative to their loans and assets during the good years"
As stated before, I have a simpler suggestion: enforce the current CapAd rules, with some serious analytic attention being paid to risk. Under Basel and the CAD, CapAd should be a function of the individual bank's exposure, and market conditions. OK, in good times some aspects of the latter are, or seem to be, benign. But properly analysed, exposure in a crap book like Northern Wreck’s is ugly at the best of times: and it wouldn’t be difficult to identify appropriate market-condition warning signals – based on the rather interesting "case-study" we have before us.
But enough of the technicalities. In simple terms, what the Bank needs is "some new instruments that sit somewhere between" ... the stomach and the kneecaps. The equipment the BoE is really lacking is balls.
Posted by Nick Drew