Financial Stability News

Flashing news about financial stability and central banking

Debuty Governor Paul Tucker on how to avoid a new banking crisis

Somewhat old interview (August 1), but still interesting points about central bank lending to CCPs, how to solve the TBTF problem, and the need for more liquidity for trading activities:

Since then, I have wanted trading book positions to incorporate an element of capital against illiquidity risk, because these books get marked to market so even if there is no change in fundamentals but the market suddenly dries up, values will fall as a result and the net worth of the dealer or bank falls sharply.

And also about how to prevent a new “blow-out” of the financial system:

Risk: Do you see any danger in a more prescriptive approach to capital modelling?

PT: This is a genuine consultation by the Basel Committee, but I would point out that there are something like 15 million people unemployed in the western world because finance imploded, and finance imploded because the rules of the game in finance were inadequate. That’s a terrible price to pay. So this business of debating exactly how to calibrate things, this is for grown ups. It’s not about whether we – if the following rich assumptions hold – can optimise capital levels. It’s about whether we can avoid having a financial system that is fragile in ways that have very high social costs.

Agree fully with Tucker!

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: