'Fundamental Overhaul' of Financial Regulations Needed

What a difference six months makes. The Bank of England’s latest semi-annual Financial Stability Report might be better titled Financial Instability Report. In May Research Recap highlighted the Bank’s concern that subprime-related losses by financial institutions may be overstated.  Seeing signs of an improvement in credit market sentiment, the Bank wrote then that 

As uncertainty falls and market liquidity improves, it should become clearer that some assets appear cheap relative to credit fundamentals, which should in turn encourage a recovery in confidence and risk appetite by speculative and long-term investors… In that environment, firms may find that previous mark-to-market loss estimates have been overstated and some writebacks of reported losses may occur.

Now, the Bank’s October report graphically illustrates the seismic changes that have taken place in the financial sector. One startling graphic shows the funding gap of UK banks:

Another illustrates the woes of hedge funds:

The report also summarizes and analyzes rescue efforts to date:

Taken together, perhaps as much as £5 trillion has implicitly or explicitly been made available by central banks and governments since April 2008 to support wholesale funding.

While temporarily helping lengthen funding maturities, this cannot be a source of funding for banks in the medium term. It will need to be replaced from private sector sources. Given the scale of this intervention, reducing reliance on the official sector as a source of funds is likely to be a significant constraint on banks’ activities over the medium term.

Looking further ahead, the Bank says “the events of the past year or so clearly highlight the need for a fundamental overhaul of the regulatory safeguards used to mitigate systemic risk within the financial system.”

The report also compares mark-to-market and credit losses, and analyses counterparty credit risks in OTC derivatives markets.

Comments

[thedozer:]

not to parse words here but....

"events of the past year... highlight... need.. overhaul regulatory safeguards... to mitigate... risk"

sounds like a "free market" to me

2008 Oct 28 05:54 PM

[kaco:]

Overhaul is needed of the OTC trading. What has to be reestablished is the central trading place via exchanges with regulated, standarised products where everybody knows the intrinsic value and risks.
Also we need really independent Moody's & S&P's to get unbiased classifications. More regulation only kills innovation and is more a break to the market than a stimulator.
Risk capital should be rewarded beter with higher dividends.
The biggest capital market in the world (USA) should stop subsidizing carmakers and energyservices with cheap oil. VAT on petrol will stimulate alternative energy much faster, free America from its oil independance and depandance of undemocratic oilstates. The Flying Dutchmen.

2008 Oct 28 06:08 PM

[thedozer:]

sounds nice Kaco... but it ain't a winning ticket my man.

that's why you don't reside in washington


let me put it for you in a voter's terms: "what he just said... or $1,000 and free healthcare...."

obama 08 yeee hawww join union

2008 Oct 28 06:18 PM

[Socialism c...:]

How about instead of restricting free-market capitalism, we regulate against socialism, which was the CAUSE of the subprime mortgage meltdown!?!

2008 Oct 28 06:41 PM

[thedozer:]

well that would make sense... and we can't have any of that....


OHHHH wait we did.... it's called THE CONSTITUTION OF THE UNITED STATES.

maybe we should look into that

2008 Oct 28 06:51 PM

[thedozer:]

further more ... socialism can't compete...

it doesn't compete... it nationalizes by definition

2008 Oct 28 06:53 PM

[Obama is Bu...:]

The Bank of England proved six months ago that it had absolutely no understanding of what was going on.

So now the clueless are saying they need more power to regulate things they don't understand? How does that make any sense at all?

Shouldn't the central bankers demonstrate a minimum level of competence and understanding before we grant them any new powers?

How about they make use of the powers they already have?

And we are all still waiting for that bonehead Alan Greenspan to admit his gross mismanagement was one of the biggest contributing factors to this crisis.

We don't need more central bank regulations -- we need someone to regulate the central bankers

2008 Oct 28 08:17 PM

[RCA:]

Socialism cannot compete! That's true, a priori. And I disdain socialism as much as you aparently do. But I can't figure out how socialism caused the subprime mortgage meltdown.

Socialism is being invoked in a morbid attempt to solve the crisis, but how was it a cause? I'm not disputing your assertion, I just can't make the connection. To me it seems like a very free and greedy marketplace caused the problem, not government regulation or socialistic market intervention. Enlighten me, please.

2008 Oct 29 12:06 AM

[JTL:]

SOCIALISM? REGULATIONS? Sorry to burst your purist bubble thinking, but they're not the same thing. Grow up! The government has been "socialistic" from it's foundation (Central Banking Issue of the 1840's, Louisiana Purchase, Depression era). Always brought on by "private enterprise", capitalism, and it's concomitant abuses. It's theme is to "get" the other guy before he gets you, leading to the necessary controls over the inherent excesses. Otherwise, it's an everlasting boom/bust situation - and basic misery for all but the moneyed few.

2008 Oct 29 10:53 AM

[Socialism c...:]

@RCA: ok, the socialists in Congress decided that we needed wider homeownership...the movement took hold during the Clinton admin, but the push began even earlier. Read up on the Community Reinvestment Act. It's all tied in with ACORN, Barney Frank, Chris Dodd, et. al., and yes, Obama. It was the beginning of the subprime lending that is now at the bottom of all this -- their push to lend to those who couldn't afford the mortgage to begin with! ACORN is federally funded as a result of those guys...and Fannie was given quotas for what percentage of loans it purchased had to be subprime...they were *told* to go get more subprime! That directly encouraged banks to lend with lower standards than they should...because they could get the origination fees and then sell it off to Fannie. Our taxes funded a good deal of this. And now we get to fund the fix as well!!

@JTL: i didn't equate socialism with regulations...and yes, we all know capitalist institutions need *some* regulations. But...that was not the core issue this time -- the issue was the way mortgages were securitized -- the originators no longer had any skin in the game, and could sell off to Fannie & Freddie, who were *encouraged* to increase their share of subprime mortgages! This was direct encouragement to lend without regard to ability to pay it back! My point is simply that that was not a problem with regulation of the private banks, it was a problem with *government* pushing lower standards!! The *regulators* were encouraging laxity!! Yes, some greedy bankers took advantage of that -- but the government & its regulators essentially LAID the opportunity right on their desks!!

So instead of crying that this economic debacle was capitalism gone awry -- no, it was very much government gone astray!!

2008 Oct 29 12:46 PM