4 replies on “Buiter on Reform of the Financial Sector”
Willem seems to have twigged that the business model of Wall St (and other) ‘investment’ banks is the systematic accumulation of conflicts of interest. Lordy me!
In an Irish context, the Govt has, willy nilly, an industrial policy problem. The Govt now owns/guarantees a large slice of an important industry. What kind of banking system would we like to see at the other end of the tunnel? How many banks, in each business area?
Should ‘systemically important’ Irish banks, continuing to enjoy an implicit State backstop, be free to engage in prop trading or overseas acquisition of assets/liabilities while the domestic Exchequer writes the (free) insurance policy? In Willem Buiter’s lingo, ‘too big to fail’ banks are maybe inevitable in very small countries – the market is too small to expect C1 or C2 ratios to be contained.
There will likely be a Euro-level regulatory (and maybe supervisory) regime of some kind, and a Basle III. Neither will address the industrial policy dilemna for small countries, nor will they address the exposure of the fisc. A go-it-alone Glass-Steagel for domestic licensed banks, prohibiting ‘capital market’ divisions, is one option. Failing the emergence of a Eurozone fiscal guarantee for the next crisis, there is no avoiding these questions.
A pointless academic article: the credit steamroller has rolled. It is gone. The horse has bolted. Build a new stable or just bolt the door. It is GONE!
This article would have been welcome 5 years ago.
NaMa represents the last hurrah for malinvestment, based on God alone knows what decision making process, but I suspect it is corrupt, the maintenance of the ruling class in Ireland.
An excellent article. There is also a trickle down effect in preventing banks being too big to fail in that the banks then must be more careful in ensuring that none of their borrowers or investment projects are too big to fail from the bank’s perspective. Similarly, the borrowers will know that the banks will not be dragged in deeper and deeper if the bank might be destroyed. Accordingly, businesses will have to behave more prudently too.
CMcC’s point is well made that it is nigh on impossible to avoid too big to fail in a small country.
In the long long term, there is always the danger that whatever reforms are brought in in will eventually be removed by a later generation a la Bill Clinton and Glass-Steagall. I guess that’s their problem!
Some analysis on suggestions in the article which I published a while ago.. Comments/criticisms welcome!
4 replies on “Buiter on Reform of the Financial Sector”
Willem seems to have twigged that the business model of Wall St (and other) ‘investment’ banks is the systematic accumulation of conflicts of interest. Lordy me!
In an Irish context, the Govt has, willy nilly, an industrial policy problem. The Govt now owns/guarantees a large slice of an important industry. What kind of banking system would we like to see at the other end of the tunnel? How many banks, in each business area?
Should ‘systemically important’ Irish banks, continuing to enjoy an implicit State backstop, be free to engage in prop trading or overseas acquisition of assets/liabilities while the domestic Exchequer writes the (free) insurance policy? In Willem Buiter’s lingo, ‘too big to fail’ banks are maybe inevitable in very small countries – the market is too small to expect C1 or C2 ratios to be contained.
There will likely be a Euro-level regulatory (and maybe supervisory) regime of some kind, and a Basle III. Neither will address the industrial policy dilemna for small countries, nor will they address the exposure of the fisc. A go-it-alone Glass-Steagel for domestic licensed banks, prohibiting ‘capital market’ divisions, is one option. Failing the emergence of a Eurozone fiscal guarantee for the next crisis, there is no avoiding these questions.
A pointless academic article: the credit steamroller has rolled. It is gone. The horse has bolted. Build a new stable or just bolt the door. It is GONE!
This article would have been welcome 5 years ago.
NaMa represents the last hurrah for malinvestment, based on God alone knows what decision making process, but I suspect it is corrupt, the maintenance of the ruling class in Ireland.
An excellent article. There is also a trickle down effect in preventing banks being too big to fail in that the banks then must be more careful in ensuring that none of their borrowers or investment projects are too big to fail from the bank’s perspective. Similarly, the borrowers will know that the banks will not be dragged in deeper and deeper if the bank might be destroyed. Accordingly, businesses will have to behave more prudently too.
CMcC’s point is well made that it is nigh on impossible to avoid too big to fail in a small country.
In the long long term, there is always the danger that whatever reforms are brought in in will eventually be removed by a later generation a la Bill Clinton and Glass-Steagall. I guess that’s their problem!
Some analysis on suggestions in the article which I published a while ago.. Comments/criticisms welcome!
On proper risk management through the elimination of limited liability in the financial industry:
http://thefreemarketeers.wordpress.com/2009/06/12/the-world-without-limited-liability/
http://thefreemarketeers.wordpress.com/2009/06/10/how-to-reform-risk-management/
On the elimination of systemic importance in banking:
http://thefreemarketeers.wordpress.com/2009/05/08/regulating-government-intervention-away/