Saturday 28 March 2009

Turner Hints at What's Really Been Going On: FSA Report (4)

A nice hint from Turner at goings-on in the gentlemanly world of banking regulation. He is discussing the relative merits of formulaic capital adequacy requirements - Pillar 1 of Basel - and requirements made at the discretion of the regulator (Pillar 2).

"Under a formula-driven system, the required level of capital would vary according to some predetermined metric ... a pre-set discipline not dependent on judgement and not subject to the influence of lobbying"

, eh ? Doesn't sound like a hypothetical concern. So - to what lobbying has our independent regulatory system been subject ? Has Gordon Brown been down there over the years, pressing for higher discretionary requirements ?

Surely the bankers haven't been trying to negotiate their capital adequacy with the FSA ?

... have they ?



Steven_L said...

Of course not Nick, it's all America's fault.

Nick Drew said...

just checking !

Anonymous said...

Regulatory capital is a nonsense. Banks are doing regulatory capital arbitrage trades to disguise their true need for capital. The current regulatory capital framework is useless for investment banks and their trading books and for extensive offbalance sheet activities. For the FSA to be looking just at loan books and running some nonsense analysis on them and deciding a complex investment bank has enough capital is a serious error in oversight and transparency. I just wonder whether this is driven by complicity or incompetence.

Steven_L said...

Last night I got drunk with someone and we were discussing saving etc.

He reckoned his bank phoned him up and told him he had too much money in his savings account and wasn't getting enough interest.

They sold him one of these products that are everywhere now where they offer you 8% or 10% a year if you put it away for 5 years.

It sounded to me like one of these ones where you get wiped out if the FTSE100 goes below a certain amount, but he was certain his cash was protected.

Anyway, these things are everywhere now. Are the banks trying to disguise their retail deposits as something else to get around capital adequacy rules?

Why are they all selling these products? I smell a rat.

Edindie said...

Surely because they expect inflation/base rate to rise over the next 5 years?

Nick Drew said...

anon - it's a real quandry, isn't it. I've never seen a complex book where an outsider could grasp what's really going on in anything under a couple of weeks of forensic effort

but the traders know exactly what's going on: so criminal sanction for not revealing underlying exposures could be part of the answer ...

Steven, Edindie - many of these products contain embedded options - and indeed the 'customer' is selling the option (usually a floor) to the product-provider

how a retail punter can be expected to form a decent assessment of this is not clear ... but a basic rule of risk avoidance is: never sell a naked option

Steven_L said...

Thanks Nick, knew they were up to something!

I know what to tell the bank manager if he ever tries to flog me one of these now.

It won't be polite and I won't despoil your blog with it.

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