US Financial Regulation Debate

There is a broad international process underway, via the G20, the BIS and the IMF, to come up with new capital and liquidity rules to be applied around the world to replace Basle 2 (see here). However, beyond re-working these rules, the financial crisis has still left lots of knotty issues unresolved, such as how to intervene and unwind large complex financial institutions that are in trouble, how to regulate derivatives and whether more severe limitations should be placed on the activities of banks (perhaps through a return to Glass-Steagal style restrictions.)

Now that healthcare reform is off the agenda, there is a pretty serious discussion in the US now about financial reform: Paul Krugman has devoted his last two New York Times op-ed columns to it (here and here.) Here’s a nice summary of the current state of play. As always with US legislation, the process is bizarrely complicated and riddled with horse-trading, with a House bill and Senate bill, potential reconciliation, and a role for the White House and Treasury Department. But, to be fair to them, the process usually ends up forcing a serious discussion of all the key issues.

It seems that if this kind of thing is going to happen over here, it will need to be done at EU level, presumably with an active role for the European Systemic Risk Board (which comes into existence when?) Perhaps I’m missing it but I don’t get a sense that there is a parallel process at European level that mirrors the current US debate. It may be too much to hope for that Europe, with its patchwork quilt of different types of banks, regulations and regulators, will ever get its act together on this front.

Clifford on incineration

Michael Clifford is not impressed by the Minister of the Environment, arguing that a minister should follow or change government policy (rather than oppose it) and that a minister of the environment should seek what is best for the environment (which, in this case, is implementing government policy).

He might have added the damage to Ireland’s reputation as a place where contracts are upheld, but I agree otherwise. See here, here, here and here.

UPDATE: Scott Whitney (of Covanta) too agrees and adds some more information.

AIB Watch: April 4th Edition

Super Tuesday turned out not to be so super at giving us a better picture of what’s going to happen to AIB. Indeed, I’ve been puzzling over some aspects of the announcements and coming up with a decent picture of what’s likely to happen requires a fair few calculations and assumptions. But here goes. I’ll break this up into two bits. Capital requirements and NAMA transfers first and then asset disposals second.

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Lenihan Says NAMA Will Stop Houses Prices Falling

In an interesting prediction, the Minister for Finance, Brian Lenihan, has said that Irish house prices will now hit bottom thanks to the NAMA transfers. The Sunday Independent reports:

Yesterday, Mr Lenihan told the Sunday Independent: “One of the good things about the steep discount, averaging 47 per cent, is that the residential property market will now be stabilised at a realistic level.”

He added: “You can now buy in confidence that the price is realistic.”

Perhaps I’m being stupid here, but I’m having troubles linking (a) The setting of prices that the government is willing to pay to banks for non-performing property loans (largely backed by commercial or development property) with (b) Prices that people are willing to pay for residential properties.

The Minister reckons the NAMA transfers will act to boost the residential property market. Just playing devil’s advocate, one could point a large surplus of properties for sale, high unemployment, pay cuts, future tax increases, higher mortgage interest margins, and future increases in ECB interest rates as factors that could act against whatever positive effect the NAMA transfers are supposed to have.

Anglo: What Are The Options?

The public debate of the past number of days has focused on the question of whether Anglo Irish Bank should be wound up and whether that could save the government money. However most of the political discussion and, unfortunately, much of the discussion on this blog, has failed to shed much light on what are the real choices available to the government and what the relevant tradeoffs are.

Both the pro- and anti-windup supporters have produced unhelpful arguments. The government have a stronger case for their actions than most people think but they have undermined themselves by citing cost figures for a windup that are literally incredible. Meanwhile, pro-windup advocates have often given little consideration to the nature of Anglo’s liabilities.

This post is an attempt to describe the issues at hand in a reasonably comprehensive way without trying to fully endorse either government or opposition positions.

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The World’s Slowest Recap: A Cunning Plan?

I think it is widely agreed that undecapitalised banking systems saddled with bad loans are a threat to the efficient functioning of the economy. I think it’s also widely agreed that, whatever the mechanism, the goal of any banking plan is to return the sector to a healthy well-capitalised condition.

Given that, I find it very disappointing that eighteen months after the Irish banks were thrown into crisis and at least a year since it was clear that losses threatened the solvency of the banks, we are still taking our time getting the banks recapitalised.

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