G20 versus Megabank

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From Banking Day today:

In a reminder of its activist work program, the Financial Stability Board has amplified its view of the priorities for the Brisbane Group of 20 summit of political leaders in November.

Mark Carney, who is head of the Bank of England as well as of the FSB, wrote in a letter yesterday that one priority of the Brisbane Summit would be for the Basel Committee on Banking Supervision to “set out its plans to address excessive variability in risk-weighted asset calculations [which will] improve consistency and comparability in bank capital ratios….reforms have brought significant new capital into the core of the financial system and made firms, investors and regulators more alert to the risks that arise from excessive leverage, poor valuations, maturity mismatches and illusory liquidity…Our task ahead is to make sure we complete the job and then manage the system dynamically and effectively. That will require more transparency, greater consistency and demonstrated willingness to adjust in the face of new information.”

Australia’s big four banks are egregious examples of the use of opaque internal risk-weighting  models that discount capital. It’s going to be quite a show as Australia hosts this push for transparency while APRA and Joe Hockey create wonderful new ways to blow smoke around our own banks. There’s already an outline of the bait and switch forming, from the AFR:

Bank of England governor Mark ­Carney and other top regulators at the G20 meeting have left open the possibility of re-appraising the rigid adoption of banking rules should evidence emerge that the flow of finance to infrastructure projects is being impeded.

Risk weightings that make it harder to finance major construction are one obstacle to financing a trillion-dollar annual infrastructure funding deficit identified by Business20, a group of chief executives helping to shape the agenda for November’s G20 summit in Brisbane.

Risk weightings determine the amount of capital a bank must set aside for different types of lending. They were tightened after the financial crisis.

B20 “sherpa” Robert Milliner said that from talking to Mr Carney and other regulators at a G20 infrastructure round table on Saturday, it was clear they wanted to see the tough Basel III capital and liquidity rules implemented. But if it could be shown that there were significant adverse unintended consequences, “they’d be ­willing to look at what those consequences were and how you would deal with them”.

The rules were not tightened here so far as we know but we’re all in the dark because the models are a closely guarded secret! This is not about infrastructure, it’s about mortgage books.

David Llewellyn-Smith
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Comments

  1. And still no mention of the actively proceeding, FSB-directed plans to bail-in depositor savings (Budget 2013/14, Portfolio Budget Statements, p. 134; RBNZ Open Bank Resolution), a la the Cyprus “template”.

    “The OBR policy is designed to ensure that first losses are borne by the bank’s existing shareholders. In addition, a portion of depositors’ and other unsecured creditors’ funds will be frozen to bear any remaining losses.”

    http://www.rbnz.govt.nz/regulation_and_supervision/banks/policy/4368385.html

    http://www.treasury.gov.au/PublicationsAndMedia/Publications/2013/PBS-2013-14

    EDIT: A more accurate title for this piece would be “Goldman Sachs-chaired FSB versus G20 Citizenry”