Monday, 19 January 2009

Bank capital? Not so much...

Sam Jones has an excellent post on FT Alphaville picking up on a momentous, and well concealed volte face from FSA. The regulator has (finally) embraced procyclicality.
We have continued to give consideration to appropriate long term changes to the bank capital regulatory framework. We believe that it would be preferable for the capital regime to incorporate counter-cyclical measures which lead to banks building up capital buffers in good years which they can draw down during economic downturns.
The well-concealed part picked up by Alphaville is:
we are amending the variable scalar method of converting internal credit risk models from point in time to through the cycle... These changes will significantly reduce the requirement for additional capital resulting from the procyclical effect.
As Alphaville says:
The FSA is authorising a modelling trick
But a particularly expedient one. Welcome to the bottom of the cycle capital regime. Just one thing. What if this is not the bottom?

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