Summary
There is no perfect solution, at best the regulatory authorities will only ever be able to play a reactive game to economic shocks such as the banking crises.
Analysis
A noble effort by the Basel Group. However, there are a number of issues that will limit the aspirations of those who see this as a panacea for future world banking ills:
1 There is no timeframe or deadline. The final agreement, as and when that materialises, will be a collection of fudges and compromises that water down the original intent of this agreement.
2 There is no agreement on the limits that bankers should earn.
3 Bankers will find imaginative ways round any limits on pay/bonuses that may be imposed; eg via benefits in kind.
4 How do you measure risk?
5 The way that the banks will raise capital ratios will be to restrict asset growth, or shrink their balance sheets. Thus the problem is neatly passed to borrowers. The knock on effect being a downturn in growth.
6 The banks may be tempted to use off balance sheet methods to hide risk (see The Consequences of The UBS Tax Evasion Cases for some basic background on offshoring).
There is no perfect solution, at best the regulatory authorities will only ever be able to play a reactive game to economic shocks such as the banking crises.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
