Midya's Weblog

CNBC Misses Possible Financial Reform Repercussions


Why New Bank Capital Rules Could Make Things Worse

I’m not sure if these assertions by CNBC apply to recently passed regulations here or just this current round of international ones. Even if it doesn’t, the justification the left gives us reason to doubt their perspicacity.

The problem is inherent and probably unavoidable. Regulators want to achieve a world-wide harmony on bank capital rules. But by reducing the diversity of regulatory regimes, they inevitably increase the costs of regulatory error.

Regulations homogenize. Banks told that certain assets count as regulatory capital will hold more of those assets than they otherwise would. If those assets are less safe than the regulators believe, banks will be more vulnerable and the banking system more fragile than it would be with less homogeneity.

If this is really inherent, tell me why the great minds at CNBC didn’t see this before the reforms were passed.  Is CNBC allowing free market theory to sneak into their newsroom?

Markets can cope with uncertainty because they do not require homogeneity. I don’t think the author really believes this.  Different companies make different predictions about which businesses will be profitable. The ones that get their predictions wrong lose money; the ones that get them right earn profits. Persistent or outsized predictive failures led to bankruptcy; while persistent or outsized predictive successes leads to growth or at least continued operations. These thoughts don’t seem to be parallel, but if this is true, then the persistent trusting of Barney Frank is what led to recent losses.  What is the market telling us about Frank?  The market process sorts winners from losers without anyone having to determine who made the right predictions.

Regulations lack this discipline. Again, more free market theory that the libs refuse to accept responsibility for when it goes against them.  Where a business can see its inventory build or profits fall and change directions, regulatory failures are often invisible until very late in the process. The failure of prior capital rules did not put the regulators out of business. In fact, this round of Basel negotiations has even more countries participating than the earlier round did. Throughout the financial crisis and afterwards, regulators have failed upward. Evaluations of which regulations failed is open to political debate rather than being self-evident.

The rules coming out of Basel will inevitably encourage concentrations of risk management strategies and asset holdings that will make the financial system more fragile. Sounds like every instance of big government up to the present day.  The more detailed the rules are, the more systemic risk-creating homogeneity will be introduced.

All of which is not to say that we don’t need banking capital regulations. For a host reasons-not the least of which is that banks have demonstrated that they can shift losses onto taxpayers-we do. But we shouldn’t be too confident in the efficacy of our new regulations, no matter how swell they might seem to us now.  Here go the libs blaming the system or even conservatives for problems they caused.  Banks couldn’t have shifted these losses to taxpayers if it were not for the left.  Banks wouldn’t have been in such a possision, though, if Frank/Pelosi/Reid had listened to Bush about Fannie and Freddie. 


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This entry was posted on September 10, 2010 by in Uncategorized.

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