Tag Archives: Capital requirement

At The End of Another Decade

New Years Eve 2010 (around midnight): It’s not only another year, it’s also the beginning of a new decade. Looking back at the past 10 years, the stage is set for a mind-blowing decade of technological breakthroughs that have the potential to change or lives completely. unfortunately, we’re probably also in for a long period of financial instability and high levels of unemployment.

“It is possible that we are facing one of the most important decades in a very long time.”

econotwist


I remember New Years eve of 2000; dot-com-mania, emerging markets,Y2K. However, I also remember 1990; deregulation, digital revolution and another collapse in our financial system. I think I’ve detected two major screw-ups over the last two decades.

I covered the stock market crash in 1987, as one of my first assignments as a financial reporter.

By 1989 economists and politicians had declared the troubles were over, the major  global economies was back on track, producing new jobs.

In my mind, the most memorable from headlines from 1991 was delivered by the Swedish newspaperDagens Industri.”

Like the page 2 editorial:

“Dear God, please cool down our economy.”

And the – now historical – headline from the day the Swedish bank central bank kicked up its key interest rate to 500%:

“Good Night, Sweden”

This was about six months before the crisis hit the Scandinavian banks like a Norwegian heat-seaking Penguin missile, and forced the governments in both Sweden, Denmark and Norway to take public control over the private banks.

They were downsized, sliced up, sold out and merged, and the result was five, six   major banks who orderly divided the Nordic home markets between them, and have so far managed to keep any serious competition out of the region.

All three governments still holds significant ownership in the Nordic banking sector.

The Scandinavian banking crisis was recently held up as an example on how to handle a crisis in the financial industry.

Well, we now have five or six banks in three small countries that have become so “systemically important” that they are “too big to fail,” and will have to be bailed out of “no matter what.”

On a global scale; the creation of financial companies that are of “systemically importance” so they cannot be allowed to default must be (at least one of the) “Biggest Screw-up of the Decade – 1990/2000.”

As for the decade now ending, not keeping up with the developments in the financial industry, allowing it to become an invisible, almost uncontrollable, monster, and not putting a stop to it, is a really heavy regulatory blunder.

In the aftermath of 2001, several financial companies and their executives were accused or convicted of fraud for misusing shareholders’ money, and the U.S. Securities and Exchange Commission fined top investment firms like Citigroup and Merrill Lynch millions of dollars for misleading investors.

Thinking back, it seems like we’ve been moving around in a circle.

Systemically we’re right back where we was in 1992, financially we’re in even deeper trouble.

The new international regulations, as they emerge in the final reports from the Basel Committee (Basel III), doesn’t provide anything that will make any significant and systemically changes.

So, my guess is that we’ll have to struggle with a dysfunctional financial market, debt and “systemically important”banks for still a long time – perhaps another decade.

Sadly, this means that the much debated economic recovery, in form of a helluva lot of new jobs, probably not is going to happen anytime soon.

I’m afraid it could take about another decade to get where we would like to be last year, in terms of labor market conditions.

But I’m also sure the next decade will bring a boom in one particular sector:

On this new years eve, we have more people using Facebook than Google, 60.000 new pieces of malware released on the internet every 24 hours and the banks are setting up high frequency information systems, with super fast connections from major central banks, financial authorities and government offices directly into their high frequency trading machines.

It’s all set for another golden age for computer engineers.

As far as the financial industry goes, it reflects the new market conditions imposed by law makers worldwide.

It’s not that amusing to engineer new financial derivatives, so the focus have shifted to the technical side.

The danger is that the financial markets grows even more complex and unpredictable, tied together in an unofficial, unregulated intranet of dark fiber cables.

And this goes beyond the markets and the economy.

Judging by the rapid pace of development over the last 10 years, the next 10 is definitively not gonna be slower.

With the so-called quantum computers just three to five years away, the computer technology, and our whole way of life, is destined for another evolutionary quantum leap, practically.

It is possible that we are facing one of the most important decades in a very long time.

I wish you all the very best.

Happy New Year!

PS:

I’d like to add a special greeting to all new readers/follower in 2010. Thanks for all your encouraging comments.

This summer the econotwis’t blogs (Swapper and Econotwist’s) blasted above  20.000 unique readers per month.

Many of you follow my Twitter, and I’m specially honored to welcome among my followers; the State of Israel, US Homeland Security and the EU Council.

Now that I got your attention; will you please tell the State of Kuwait to stop trying to hack into my computer!?

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Filed under International Econnomic Politics, National Economic Politics, Philosophy, Technology

Is Another Market Crash Inevitable?

The new capital requirements for financial institutions – known as Basel III – has been widely discussed lately. The plan is to raise the bank’s capital ratio, not to avoid another financial crises, but to lower the frequency of them. Isn’t there a better solution? Well, J.S. Kim at SmartknowledgeU think there is…

“In crisis, we turn to our governments and bankers to help us out, a very foolish response since it is bankers and governments that have created this crisis.”

J.S.Kim


“Today, there is not a single government in the world that has provided an adequate or sustainable solution to our global monetary crisis,” the founder of the independent research and investment firm SmartknowledeU, J.S.Kim, writes in his latest newsletter.

Here’s the rest:

The most prominent criticism from Keynesian apologists regarding our monetary crisis is that there is no better system than the one we are using and that supporters of Austrian economics always complain but offer no solutions.

This simply is not true.

Rather, our global leaders refuse to hear or consider the solutions we present.

Because our global leaders’ “solutions” to our present monetary crisis are false “solutions” predicated on the guidance of bankers, there is ZERO CHANCE that the world will not be plunged into another financial crisis that is deeper than the one we experienced in 2008 despite the denials of our political and banking leaders.

Today, citizens desire real change, not change disguised as maintenance of the status quo that politicians and bankers offer to us.

Today, we are unfortunately afflicted with a state of learned helplessness.

In crisis, we turn to our governments and bankers to help us out, a very foolish response since it is bankers and governments that have created this crisis.

How can we expect real change from the perpetrators of this crisis?

Any real positive change that has benefited citizens has always been sparked not by the State, but by individuals.

Today, the results of our dependence on bankers and governments to produce change will result in certain failure and more restrictions on our freedom.

In my book, “The Golden Gift,” is an idea that I believe can revolutionize the current monetary system and ensure that the current global economic catastrophe of massive unemployment and currency devaluation that plagues nations in the Americas, Asia and Europe will be unlikely to ever repeat itself in the future.

Not only is this idea a relatively simple idea to implement but it would also impact humanity in a massively positive manner, from helping to alleviate poverty, to restoring peace between warring nations, to destroying the conditions that give rise to terrorism.

It is a simple idea yet one that would have profoundly positive humanitarian implications in an indirect manner as well as a direct manner.

And most importantly, it is an idea that could be implemented despite the strong opposition it would assuredly receive from Western governments and bankers.

While far from a perfect solution, I hope that my idea will spark a discussion that will eventually create an implementable solution if the one I have presented currently contains too many flaws.

I strongly believe that one must have, at a minimum, a basic understanding of the artificial framework in which we live where those in power constantly sell propaganda to us as truth, if we are ever to break free of their mental and psychological constraints.

J.S. Kim

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I believe that we must explore the reasons why society holds so many widespread beliefs to be true that are not, and why we often hold beliefs so tightly for no other reason than the fact that someone, somewhere, at some point in our lives, ordered us to believe it.

If we can understand this, then perhaps we can awaken from our century long slumber.

And at least that is a start.


By J.S. Kim

Managing Director & Chief Investment Strategist

SmartKnowledgeU

Related by the Econotwist:

Bank of Canada Puts Price Tag On Basel III

Central Bankers Propose To Propose Repo Clearing Arrangements

Bankers Hail The New Basel III Regime

Central Bankers Announces A Higher Form Of Capital Standards

Basel III And The Fawlty Towers

Will Basel III Crush the Global Economy?

Is Quantitative Easing An Attack On Your Freedom?

Beware: Global Asset Bubbles Growing!

6 U.S. Banks Collects 93% Of Industry’s Trading Revenue

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Bank of Canada Puts Price Tag On Basel III

According to analysis done by the Bank of Canada and the Basel Committee, the higher capital requirements for banks as agreed in the Basel III agreement, will reduce the economic growth in G-20 countries by 8,8%. In addition will the transition period of four year reduce the groups average GDP by 1.1%. However, governor Mark Carney of Bank of Canada argues that the long term benefits can be far greater if more regulations are added.

“The only benefit quantified is the gains to GDP resulting from a reduced probability of future financial crises.”

Mark Carney

More and more details about the central bank‘s Basel III agreement are surfacing. The new capital requirements that are scheduled to be implemented over the next eight years will be no problem for most banks, but for the rest of us will it probably make the recovery period longer and harder.

The full text of governor Mark Carney’s speech at the German Bundesbank’s annual meeting in Berlin this week is just  released by the Bank of International Settlements.

It’s quite an interesting read.

Together with the Basel Committee, Bank of Canada have estimated both the cost and the benefits from raising the capital requirements in the financial sector, and highlights the long term benefits that are assumed to be a 30% – 40% increase in the G-20 nations GDP.

Exactly how long the “long term” is, is not said.

But what’s perfectly clear is the the short term cost – the implementation period – will be substantial.

According to the analysis, the first 2% raise in the banks capital ratio will lead to an average fall in the G-20’s GDP by 5% (about 1,7 trillion euro).

The next step, up to 4%, will reduce the average GDP by 8,8% (almost 3 trillion euro).

In addition, the transition cost are estimated to an equal of 1,1% of GDP (around 370 million euro).

Filling up the banks will not only have a negative impact on economic growth for the rest of this decade, it will also cost us another 5 trillion euro.

Mark Carney

In this analysis banks are assumed to” fully pass on the costs of higher capital and liquidity requirements to borrowers rather than reducing their current returns on shareholders’ equity or operating expenses, such as compensation, to adjust to the new rules,” Mr. Carney points out.

Adding that the higher capital and liquidity requirements are “assumed to have a permanent effect on lending spreads, and hence on the level of economic output. No allowance is made for the possibility that households and firms may find cheaper alternative sources of financing.”

Before he makes the following punchline:

“The only benefit quantified is the gains to GDP resulting from a reduced probability of future financial crises.”

And that is 10 trillion euro, according to the analysis – long term, of course.

There Will Be More

Governor Carney’s speech also reveals a broad set of measures that currently are under consideration by the central bankers.

Banks can follow several strategies to meet regulatory demands for higher capital requirements, besides passing the cost on to the customers,  governor Carney points out.

“Consider the alternative. If banks were to reduce personnel expenses by only 10 per cent (equal to a 5 per cent reduction in operating expenses), they could lower spreads by an amount that would completely offset the impact of a 2-percentage-point increase in capital requirements,” he says.

The idea behind the Basel III arrangement is that higher capital ration will lead to less market volatility, and thereby increase economic growth.

“A much more significant impact can be expected from other macroprudential instruments under consideration. These include varying loan-to-value and other credit terms in mortgage markets, adopting through-the-cycle margining in core funding markets, and the introduction of countercyclical capital buffers,” the BoC governor told the audience in Berlin.

Also; “there is a range of initiatives under consideration to reduce moral hazard, including new frameworks for the effective resolution of banks, more intensive supervision of key institutions, the introduction of contingent capital, and the creation of more robust infrastructure.”

And:; “the totality of the G-20 reforms has the potential to shift the balance between resiliency and competition. By creating a system that is robust to the failure of a single firm, reforms could increase the competitive intensity in the financial services sector.”

According to Mr. Carney, the fundamental objective of the reforms is to create a system that efficiently supports economic growth while providing financial consumers with choice.

“This means ensuring that individual financial institutions are stronger and less systemically important, that more options for liquidity are available in all states of the world, and that the new measures promote competition.”

So, just to make it perfectly clear; the goal of this reform is NOT to prevent another economic crisis, just to reduce their frequency.

“A fully risk-proofed system is neither attainable nor desirable. The point is not to pile up so much capital in our institutions that they are never heard from again, either as a source of instability or of growth. The challenge is to get the balance between resiliency and efficiency right, governor Mark Carney of Bank of Canada concludes.

Here’s a copy of the transcript.

Related by the Econotwist:

Central Bankers Announces A Higher Form Of Capital Standards

Bankers Hail The New Basel III Regime

Will Basel III Crush the Global Economy?

Central Bankers Propose To Propose Repo Clearing Arrangements

In The Mind On Jean-Claude Trichet

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