Economics and similar, for the sleep-deprived

A subtle change has been made to the comments links, so they no longer pop up. Does this in any way help with the problem about comments not appearing on permalinked posts, readers?

Update: seemingly not

Update: Oh yeah!

Wednesday, December 07, 2011

Facts about financial regulation

By pretty popular acclaim, the two banking systems and their regulators which have come through the crisis with their reputation closest to intact are those of Canada and Australia. With Sweden perhaps close behind. All three of these regulators share a specific policy approach. Can you guess what it is?

They more or less explicitly endorse a cartel of a small number of major banking groups in the domestic market. This ensures that a) the banks are consistently strongly capitalised, because they are profitable, b) they have a reduced incentive to expand lending too rapidly, because margins are high enough to allow them to earn a mid-teens return on their enlarged capital base, c) they have a reduced incentive to take risks in non-core business areas, because doing so would put at risk the "franchise value" of their core domestic lending business and d) they tend to have a much more respectful and obedient relationship with their domestic regulators because they know that the regulators are on the same side. France used to have a version of this more or less formalised (they called it the "ni-ni" regime - no charging for bank accounts, no payment of interest on current accounts) until they caught a bit of neoliberalism.

A profitable banking system is a safe banking system, it's known throughout the world regulatory community. Now, how are we going to fit this insight into our new post-crisis regulatory framework?

(POSSIBLE QUICK-WAY SOLUTION: We can regulate bonuses! That will make the banks more profitable! WHY IT DOESN'T WORK: Sadly, any cost improvements of that sort get competed away quite soon in a banking system that looks like the UK or USA rather than Canada or Australia).

(I actually think Australia is riding for a fall, for largely unrelated reasons. Australia, Canada and Sweden all have incipient real estate bubbles, which have been retarded but not eliminated by tough and prescriptive regulation. It will be interesting to see what happens if and when they bust, as this will destruction-test, one way or another, the idea that there was anything at all that could have been done at a regulatory level to prevent or mitigate our own crisis).
8 comments this item posted by the management 12/07/2011 11:09:00 AM

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