Monday, 10 May 2010

Nailed by Wolf

For the vanishingly small number of people interested in this stuff, here's a summary of financial reforms recommended by the FT's Martin Wolf - I think they're spot on:
First, raise capital requirements... Leverage ratios of 30 to one are crazy. Three to one looks far more sensible.
Second, institutions must also have substantial liabilities that can be converted into equity or treated just as if they were equity, in a bankruptcy procedure...
Third, make capital requirements powerfully counter-cyclical.
Fourth, make sure that banks hold a large stock of assets that are easy to value by lenders of last resort.
Fifth, shift incentives within firms. The managers should receive bonuses in shares they cannot sell until years after they have left . . .
Sixth, impose much higher capital and collateral requirements against trading in derivatives. All such activities should be moved on to exchanges. Yes, innovation would be slowed. When the costs of innovation are borne by others, that is good sense.
Seventh, radically improve the quality of information available. Particularly important is a change in payment of rating agencies. Since these provide a public good, they must be funded by a general levy.

It's desperately important that Britain's new government takes a lead on implementing these. We're all in mortal financial danger until they're in place.

H/t Thomas PM Barnett.


Gadjo Dilo said...

Sadly, economics is a closed book to me, but I take your word for it and sincerely hope that whoever takes up the reins will implement such steps.

zmkc said...

If only I understood a single word you're saying, I'm sure I'd agree with the lot. And just in case what you are saying is pay your mortgage off and never have any debt, we have already done that and you are absolutely right - it gives you an exhilirating sense of freedom.

worm said...

all your points make absolute sense - but what happens when no other countries take up these sensible procedures, and their banking hubs leapfrog over ours? Isnt that the danger?

Sean said...

Same mentality behind the rise of the big banks and the EU and the Euro, big is best, consolidate power..trouble is when they blow we all pay.

All good stuff, but this is high walls not firewalls, personally I would get rid of the ratings agencies, work out for yourself if a investment is worth it and you bear the loss or reward.