00:00:01
What's the likelihood that anything like
00:00:03
what your committee would like to see is
00:00:05
going to happen? I assume it's not very
00:00:07
likely. Well, I the whole thing almost
00:00:10
ran a ground in uh the end of last year
00:00:13
because the French figured out that they
00:00:15
were not going to be remotely able to
00:00:17
make it. So, they were going to block
00:00:18
the whole ratio and consequence the
00:00:21
committee added all of these uh
00:00:23
mitigating features that that made it uh
00:00:26
much much less useful to the extent it
00:00:28
ever was. Um but the US still has a
00:00:31
chance to go its own way and the US does
00:00:34
have a fairly powerful voice in these uh
00:00:36
matters because it it remains the
00:00:39
banking center, the largest economy and
00:00:41
financially by far the most important
00:00:42
economy. Um but whether we will have the
00:00:45
courage to do that um remains unclear
00:00:49
given the rules that the Basel committee
00:00:52
is now looking at the more watered down
00:00:55
version after some lobbying by countries
00:00:57
on behalf of their banks um who the
00:01:00
banks may not have been able to to to
00:01:02
meet the requirements. Will what comes
00:01:05
out of this in any way um would would it
00:01:09
be able to prevent the kind of crisis
00:01:11
that we had last year? Almost certainly
00:01:13
not. Um the problem with these very
00:01:17
detailed measures is that they really
00:01:19
invite regulatory arbitrage and they
00:01:22
affect bank behavior in ways that are
00:01:25
not always predictable but almost always
00:01:28
undo the intent of the the ratio. Uh so
00:01:32
we're kind of fooling ourselves to have
00:01:33
something we think out there is that is
00:01:35
going to be a protection which really
00:01:37
doesn't afford much of a buffer at all.
00:01:40
Okay. So 20 countries sat down roughly
00:01:42
20 under the Bosel umbrella and said we
00:01:45
want to come up with ways to prevent the
00:01:48
kind of financial crisis that happened
00:01:50
last time and in fact they're not coming
00:01:52
up with a way that would prevent the
00:01:54
crisis. Well, if you were more
00:01:55
optimistic, you'd say this is the first
00:01:57
step on the way to finding a way to to
00:02:00
deal with liquidity. And it is true that
00:02:02
they'd never really explicitly dealt
00:02:04
with liquidity before. Uh, and it
00:02:06
probably was a good time to think about
00:02:09
it, but I don't think what they came up
00:02:11
with was uh going to be an answer that
00:02:13
will be very helpful. Okay. So, they
00:02:15
watered down liquidity rules, no pun
00:02:18
intended. Yes. And they also pushed it
00:02:21
out to to where full compliance is in
00:02:25
2019 or so. Yes. Which means we better
00:02:28
not have another problem over the next
00:02:30
for sure. They're they're counting
00:02:31
heavily on the fact that that uh
00:02:34
everything is all fixed for the moment
00:02:35
which certainly doesn't look so likely
00:02:37
in Europe. But what they've done as they
00:02:39
have in several other things is to give
00:02:41
very generous phase in periods for so
00:02:44
that any bank that is inconvenience at
00:02:46
the moment will have a lot of time to
00:02:48
adjust. So I think the rule is currently
00:02:50
written and this also is one of the
00:02:52
softenings that took place in in
00:02:54
January. So that uh banks have to meet
00:02:57
60% of the ratio I think by 2016 maybe
00:03:02
2015 I'm yeah and then they have to do
00:03:05
another 10% a year. So it's about 2020
00:03:07
before it happens. Now that has two
00:03:10
implications. One is that the inference
00:03:12
you made that if something happens in
00:03:14
between we're in trouble. But the other
00:03:16
is a political factor. The more time you
00:03:19
have in these phasein periods, the more
00:03:20
lobbying pressures you have for further
00:03:22
softening of the rules. They're not
00:03:24
likely to get tougher. They're only
00:03:25
going to get weaker. So the new rules
00:03:29
are highly unlikely to prevent the kind
00:03:31
of crisis that we saw last time. Do they
00:03:34
offer anything? In other words, do they
00:03:36
at least serve as an early warning
00:03:38
system? Might they help set off some
00:03:40
alarm bells, canary in the coal mine
00:03:43
kind of thing um that at least would
00:03:46
help us to start to whip the emergency
00:03:48
action a little bit sooner? Or is this
00:03:51
the kind of thing that it just spirals
00:03:53
out of control so fast that if you don't
00:03:55
have something right away that grabs
00:03:57
hold of it, then um you know what
00:03:59
happens months later is not very
00:04:02
helpful. You've defined the essence of a
00:04:04
liquidity problem. Liquidity is not one
00:04:06
of those slow
00:04:08
agonizing creeps toward the edge of
00:04:11
disaster. It happens in a flash. And um
00:04:14
the more dependent banks become on
00:04:18
short-term funding, either
00:04:19
collateralized or just borrowing and
00:04:21
wholesale markets, the more vulnerable
00:04:23
they are to these really rapid uh
00:04:27
declines. uh with the credit side,
00:04:30
regulators have a bit more control. They
00:04:33
can sort of ignore deterioration in
00:04:35
credit and accountants have been very
00:04:37
accommodating in in helping that uh that
00:04:40
process. So that forbearance is is
00:04:42
fairly common. But once the market
00:04:44
understands that deterioration has taken
00:04:47
place and begins to be reluctant to roll
00:04:50
over their
00:04:51
liabilities, there has to be immediate
00:04:54
action or the institution is simply
00:04:56
gone.
00:05:00
[Music]
