RBA Assistant-governor (Financial System) Malcolm Edey has today released a contribution to an international forum, Beyond Basel III, apparently being held in Sydney. (This suggests a new Star Wars epic and, when one learns Basel III will take 8 years to introduce, and that Basel II failed to prevent the Global Financial Crisis, the analogy strengthens.)
Here is a link. http://www.rba.gov.au/speeches/2011/sp-ag-240311.html
I must however thank Malcolm Edey and his colleagues for such a crisp presentation of several matters covered in the ‘solution’ part of Great Crises of Capitalism.
Under the heading ‘what went wrong’ Edey says:
‘This isn’t the occasion to give a detailed account of what caused the financial crisis. But regulators around the world drew a number of important lessons from it:
•banking systems needed more capital, and better quality capital, to withstand losses;
•they needed to be made more robust to liquidity risk;
•loan underwriting standards needed to be improved;
•governance arrangements for banks and financial regulators needed to be improved;
•various forms of conflict of interest needed to be eliminated or better managed. Examples of that included the originate-and-distribute lending model that went seriously off-track in some countries, and the role of rating agencies in advising on structured securities. It also included badly structured remuneration practices in the industry;
•and there needed to be more scope for regulatory regimes to act against the build-up of financial excess.
He adds that ‘Not all of these are matters for the Basel Committee. There are a number of different international bodies working on these things in their different spheres of influence, including the G-20, the Financial Stability Board and the international insurance and securities regulators. But since this is a conference about Basel III, I’ll focus mainly on the work of the Basel Committee’.
One glaring omission is what is to be done about the culture of rampant greed and predatory attitude to customers that has flourished and is still alive and well. The movie Inside Job will provide a nice top up on this matter, and Great Crises provides comcrete suggestions.
Edey lists some recommendations to deal with the above list of causes and comments that ‘there is a lot of work coming from the international regulatory bodies that’s still to be completed. By that, I mean work that groups like the Basel Committee have started but not yet finished, and also areas where the Australian regulators have work to do in determining our response to the new international standards’.
He also notes that the Basel II ‘reforms’ introduced in 2008 failed to prevent the Global Financial Crisis. I have yet to hear of one regulator who lost his job because of this, but I guess job security is what global econocrats mainly play for.
Remaining matters discussed in some detail include ‘The Liquidity Standard’, ‘The Counter-cyclical Capital Buffer’, ‘Systemically Important Banks’, ‘Is There Too Much Internationalisation?’ and ‘Supervision and Lending Standards’.
Mr Edey’s ‘Endpiece’ touches on the RBA’s Financial Stability Report released today. (Here is a link
In summary, and acknowledging the various recent adverse events and ongoing risks and uncertainties: ‘Australian banks are in good shape, and they came through the crisis profitable and well capitalised. They have strengthened their liquidity positions and their use of deposit funding. Australian businesses have reduced their gearing. Households have raised their saving rates.
Looking ahead: ‘… it seems unlikely that we’ll be going back to the days of consistent double-digit growth in credit that we saw in the pre-crisis years. That growth was driven in part by factors that can’t be repeated – the deregulation of the financial system in the 1980s, and the transition to low inflation in the 1990s. In the post-crisis environment, borrowers and investors are more cautious than they were, both at home and abroad. That’s likely to mean less demand for leverage and less growth in private balance sheets, even when the economy itself is growing strongly. If those trends continue, I think it will be good for financial stability, but it will also mean that our lending institutions have to get used to lower rates of expansion than were typical in the pre-crisis years’.
No doubt there will be more prudent behaviour by most individuals, companies and banks in the next few years, perhaps even for a decade or two – allowing the new rules to be cemented in place.
But the lesson of history is that unsustainable booms recur, and in the past thirty or forty years asset booms and busts have been occurring more often and with greater volatility.
What a pity that our international econocrats have not (so far as we know) squarly faced the issue of the poor culture that is a prime cause of this dangerous and repetitive set of events.
Those who do not study history …