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Regulators could learn a lesson from frisbees

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Shane Wright Economics Editor, The West AustralianUpdated September 24, 2012, 2:05 am

Frisbees and dogs catching them normally don't pass as debate for banking regulation. But one of the globe's best central bankers, the Bank of England's head of financial stability Andrew Haldane, has drawn the two together in what is a must-read for regulators and bankers everywhere.

The case that Mr Haldane has laid out - that we are now demanding so much information from banks that regulators are in danger of not seeing the next Great Recession - is compelling.

Mr Haldane, who delivered an address to the world's central bankers at a recent retreat in the US, reckons regulators need to look at frisbees and dogs before coming up with new banking laws.

His simple case is that if a physicist were to write down how to catch a frisbee, they would need to understand and apply Newton's law of gravity.

"Yet despite this complexity, catching a frisbee is remarkably common," he pointed out. "It is a task that an average dog can master. Indeed some, such as border collies, are better at frisbee-catching than humans."

In other words, catching a frisbee is pretty easy but if you think about it too much and try to understand the physics involved, then it becomes well-nigh impossible.

Mr Haldane's broader point was that over the past 20 years, as banks and finance companies have sought to deliver more and more complex goods to markets, regulators have demanded more and more information from those banks.

At the same time, regulators have put in place more and more laws.

For instance, the Basel I agreement - governing the world's banking sector - was just 30 pages in length. Basel II, signed off in 2004, reached 347 pages.

Now Basel III, agreed in the post-GFC year of 2010, hit 616 pages.

At the country level, it's even worse.

The Glass-Stegall Act of 1933, which was the response of the US Congress to the banking mischief that helped deliver the Great Depression, was just 37 pages long.

There are plenty of analysts who argue it was the unwinding of those simple 37 pages that delivered us the GFC.

The Congressional response to the GFC was the Dodd-Frank Act which runs to 848 pages.

But it doesn't stop there. The Act has an additional 400 pieces of rule-making attached to it, about a third of them implemented, running to 8843 pages.

Mr Haldane estimates by the time all those rules are in place, total pages of legislation could run to 30,000 pages.

At the heart of those regulations are requirements by banks to report back to their regulators.

In Europe, estimates are that the compliance costs of Basel III equate to 200 full-time jobs for a mid-size bank.

It's no surprise that in Australian banks the biggest growing employment area is in the regulation area.

The Australian Bankers Association says that one of our biggest banks has to supply about 200,000 cells of data a year to various supervisory institutions.

Then add in the "ad hoc" calls for information that include requests from the Tax Office for data to help them nab people who aren't paying their tax.

On top of all this, the banks themselves are using increasingly complex models to come up with products to sell.

As we learnt during the Great Recession, those models failed. They couldn't account for something (house prices falling by more than 20 per cent in the US) that was actually happening.

Mr Haldane's call to arms is that it is time to step back, simplify and focus.

He argues it is time for regulators to develop a few easily definable and measurable indicators.

There's so much information being collated that trying to discern real trends is almost impossible. Some laser-like focus, however, gives regulators at least a chance of finding the next big problem.

The Reserve Bank's Luci Ellis raised similar points last year. She used the platypus as her analogy about what regulators need to look for when stopping a future great recession.

She said that when Europeans first saw a platypus, they thought the animal was a fake, that it had been stitched together from other creatures.

Ms Ellis' point was that regulators should look for similar unbelievable creatures in the banking sector - No Income No Job No Asset loans (the infamous Ninja loans of the sub-prime debacle) come to mind.

Perhaps Australia's regulators needed to read Mr Haldane's speech before putting out an almost-200 page consultation paper recently about proposals for the banking, life insurance and superannuation sectors.

The proposal to "strengthen APRA's (the Australian Prudential Regulation Authority) crisis management powers" also would demand more information and more regulation over the three sectors.

On page 184, APRA admits that its proposals "may impose some compliance costs".

If the costs can be justified by making the financial system safer and more robust, that's one thing. But if the benefits are marginal, or they just add to the complexity of regulation, then they're a step too far.

Mr Haldane, whose job is to ensure the stability of Britain's financial sector, is not against tough regulation. But he wants it to be simple, and a simple system would surely enjoy wide support by ordinary people able to understand what is going on.

If our policy makers don't get this right, we will get a repeat of the Great Recession in 10 or 20 or 30 years time.

 


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  • doyla66
    doyla66 Monday, 24 September 2012

    Simple and tough regulation sounds better than complex and fluffy - but it has to be enforced across the industry to be any use.

  • doyla66
    doyla66 Monday, 24 September 2012

    The "Dogg-Frank Act" - but can it catch frisbees or dogs breakfast? Time to step back,simplify,focus & ENFORCE! Great Recession models failed - banks using increasingly complex models to come up with products to sell.

    RBA's Ms Ellis' point was that regulators should look for similar "unbelievable creatures" in the banking sector [of which there are many ie: 36 RMBS bankster creatures] - No Income No Job No Asset loans (the infamous Ninja loans of the sub-prime debacle) come to mind.

    In AUS, "Asset Loans" are being fraudulently re-classified as A1 or AAA credit rating to complete bankster' incubated - broker channel mortgage fraud.

    Mr Haldane, whose job is to ensure the stability of Britain's financial sector, is not against tough regulation. But he wants it to be simple, and a simple system would surely enjoy wide support by ordinary people able to understand "what is going on".

    If our policy makers don't get this right, we will get a repeat of the Great Recession in 10 or 20 or 30 years time.

    That's wishful thinking, more like - within (1) or(2) or (3) years at "latest", absent any immediate corrective measures being implemented NOW!!!

    Royal Commission ASAP!

  • doyla66
    doyla66 Monday, 24 September 2012

    I like your 'logo' Andy. It sure stands out.

  • doyla66
    doyla66 Monday, 24 September 2012

    thanks John.. "in a aus-sino bankster shop!"

  • doyla66
    doyla66 Monday, 24 September 2012

    This makes me chuckle. A fan of Raging Bull? Charging at the banksters? Do we need a "cape" to protect us from your charge at them ;) He's a pretty mean looking bull :)

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