I here quote San Francisco Federal Reserve Bank President Janet Yellen from MarketWatch today: "Fed and Treasury Department suffered from a "shortage of tools" in preventing the collapse of Lehman Bros. in September".
Of course, the whole system was built up in an ambition to prevent bankruptcies and thus instability in the financial system. But it did not because it is not possible to regulate away bad management. This means that the whole Basel framework and the concept of 100% automated risk management and arm's-length banking has to be questioned.
The new regulatory framework must be built on relationship banking principles and a survival of the fittest environment for banks. The regulation has to shift focus from in detail describe how the banks' shall perform risk management to a system that can manage bank defaults from spreading into the real economy.
Of course, the whole system was built up in an ambition to prevent bankruptcies and thus instability in the financial system. But it did not because it is not possible to regulate away bad management. This means that the whole Basel framework and the concept of 100% automated risk management and arm's-length banking has to be questioned.
The new regulatory framework must be built on relationship banking principles and a survival of the fittest environment for banks. The regulation has to shift focus from in detail describe how the banks' shall perform risk management to a system that can manage bank defaults from spreading into the real economy.
0 comments:
Post a Comment