For those of you that don’t know, Sheila Bair is the former Chairperson of the U.S. Federal Deposit Insurance Corporation (FDIC) and something of a hero of the GFC given her FDIC never bought into the new age drivel of Greenspan & Co about derivatives mitigating bank risk. She has some good advice for Australia today. From The Australian:
“Capital levels around 5 per cent of liabilities [equivalent to leverage of around 20 times] certainly doesn’t leave a huge cushion of equity if asset prices decline,” she told The Australian, wryly observing the “very healthy amount of debt” of Australia’s big four banks.
“It’s hard for me to see how some could argue the banks are regulated too tightly given those ratios” she said, suggesting the system of ‘risk-weights’ instituted by the Basel banking accord — which has encouraged home rather than business lending and enabled banks to model their own risk — was “too gameable and hideously complex”.
“These internal models are pro-cyclical: mortgages look safe with reference to the past but all of a sudden that can change,” Ms Bair said.
She said the Basel committee of bank supervisors had done substantial work analysing the impact of higher capital requirements on the cost of credit.
“It is pretty darn small but the public benefits are large,” Ms Bair said of the costs.
…“Not to imply bad faith among the banks, but they will rationally try to reduce their risk-weighted assets as a share of total assets to maximise their rates of return,” Ms Bair said.
That is very sage advice from a lady of high integrity and unparalleled experience. David Murray should heed it with both ears.
