Friday, 20 March 2009

Details, details

Martin Wolf is a little harsh on Lord Turner in the FT. He says:
First, it does not explain why we can hope to contain the behaviour of companies too important to fail.
True, but increased capital requirements will certainly help, along with better supervision of liquidity risk. The devil is in the details, I know, but Turner has not clearly not addressed this.
Second, it does not demonstrate that regulators can contain regulatory arbitrage by profit-seeking financiers.

Third, it does not deal with risks posed by institutions that may be too big to rescue by some host countries.
Stronger supervision of on-shore entities without too much respect for home country supervision of the parent will help. And Turner is surprisingly harsh on the EU passport regime. Clearly there is a limit to the extent of the UK's extra-territoriality, but within that Turner is certainly looking in the right direction.
Fourth, it does not explore the room for charging heavily for guarantees.
Fair point. I should like to see a UK version of the FDIC scheme where all banks pay a premium for the deposit insurance the government sells to them. This premium should I believe be strictly based on the notional of deposits, and not on any risk measure of the deposit taker (which will always let the big boys off lightly).

I still like the idea of taking this deposit insurance premium in the form of a call option on the bank's stock (which the regulator would hedge, hence locking in its value), but obviously this is fairly left field.

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