A small town in Switzerland

The Basel committee is meeting soon, unusually enough actually in Basel, although I suspect in a rather nicer hotel than this.Gillian Tett discusses the gathering. The BCBS has a significant problem on their hands:

Thus the crucial question confronting the central bankers this weekend, as they fly in to snowy Switzerland is twofold: first, are we on the verge of a new downward lurch? And second, is there anything the G10 bankers can actually do to stop this?

The problem Tett identifies relates to mark to market:

But these days the US government faces a crucial impediment to repeating this trick. Back in the days of the S&L crisis, US banks were not forced to mark their books to the firesale prices. But now the mark-to-market creed has taken hold. And it is a fair bet that if US banks were forced to mark their books to the initial clearance price for a CDO squared, say, some would run out of capital. Hence the trap: in the modern financial system, you can have mark-to-market accounting systems, or quick action to establish clearing prices, but probably not both, without blowing up some banks.

That's not hard to fix. Give a temporary waiver to the bank for capital calculations relating to these assets. Allow banks to move existing ABS securities and derivatives into the banking book for a short period, and let the banks know how long they have to get back inside the park. And don't tell anyone you are doing it. That will restore confidence. Tett herself is skeptical that this is possible:

But I would be surprised if any action occurs soon.

Perhaps coordinated action is unlikely. But it would not surprise me if this was already happening.

Incidentally this brings out an interesting point. Do the regulators have the power to do this? They have complete power over regulatory capital, but not over accounting. I'm not sure if it would even, strictly speaking, be legal for a bank to move a fair value asset under IAS 39 into the banking book and not mark it. The regulators could permit the banks to ignore the deduction to Tier 1 caused by losses on these instruments, but the key difference is that these losses would still have to be published in the banks' income statements. Perhaps that is something the central bankers should discuss.