# Onq and Jim's discussion of BIS



## Jim2007 (3 Jul 2011)

onq said:


> I understand that banks used derivatives amongst other means to fudge  compliance with the previous limit for fractional reserves set by the  BIS.
> The requirement to comply with this ratio set by the BIS appears to have  contributed, if not directly caused, the current world financial  crisis.
> I understand that Banks and Insurance companies use actuaries to advise  them of potential risks and set rates of interest on loans etc.



Well this is a new one on me, just who is claiming that the BIS caused the crisis?  Please provides some references.

On an international basis UBS AG was one of the worst hit having to write off $50b of it's own capital and as a consequence raise new capital of about $45b+ and Swiss government support of about $6b to survive (at this point the government support has been repaid at a profit to the government).  UBS have produced a very detailed report on how it all went wrong and it makes very good reading for anyone trying to understand what went wrong with the banks.  [broken link removed].

In summary it would appear that three factors caused UBS and by extension other banks to act as they did:
- An over reliance on maths models to assess risk, rather than applying common sense
- Senior management bonuses driven by short term profitability goals rather than long term outcomes
- Abolition of the Glass-Steagall Act in the US and similar legislation in Europe, which freed the banks to use their capital to finance much high risk activities than before, including mortgage securities

To date this is the first time I've ever heard the BIS being blamed, so I'm very interested in seeing the references...

Jim.


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## Complainer (3 Jul 2011)

What is BIS?


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## onq (3 Jul 2011)

The Bank for International Settlements, it operates - with no mandate - as the Central Bankers Bank, so far as I have been able to determine.

http://en.wikipedia.org/wiki/Bank_for_International_Settlements

Its potential for worsening the international credit crunch for calling for higher interest rates is second to none.

http://www.guardian.co.uk/business/2011/jun/26/international-banking-regulator-rates

Certainly not everyone sees the BIS as a benign influence.

http://bullionbullscanada.com/index.php?option=com_kunena&Itemid=122&func=view&catid=17&id=9807

And its historical origin and role in Europe exposes the real reason why Germany didn't invade Switzerland.

http://www.bilderberg.org/bis.htm

The veil of relative secrecy surrounding the BIS' mandate and the threat to the world economy that this centralised and unmonitored power represents - if misused - is being eroded.

ONQ.


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## onq (3 Jul 2011)

Jim2007 said:


> Well this is a new one on me, just who is claiming that the BIS caused the crisis?  Please provides some references.
> 
> On an international basis UBS AG was one of the worst hit having to write off $50b of it's own capital and as a consequence raise new capital of about $45b+ and Swiss government support of about $6b to survive (at this point the government support has been repaid at a profit to the government).  UBS have produced a very detailed report on how it all went wrong and it makes very good reading for anyone trying to understand what went wrong with the banks.  [broken link removed].
> 
> ...



What's your connection to the BIS Jim?

ONQ


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## Jim2007 (3 Jul 2011)

onq said:


> What's your connection to the BIS Jim?
> 
> ONQ



I have no connection what so ever to the BIS...  apart from the fact that I used to walk past it's head quarters in Basle on my way to work for 4 years.

On the other hand, over the years, I have, as the author of various banking software applications, been involved in several discussions about implementing it's requirements known as Basle II and now Basle III, so I am more aware than most of it's importance in the banking community.  And as I have already said I have yet so see any credible argument to suggest that the crises was caused by the BIS.

And while it is true that Basle III, will require banks to meet a higher T1 ratio, which will result in them being less profitable, they will at least be less risky from a depositors point of view.

With respect to your references, the wikipedia article is very good of course, but the rest sound more like your typical conspiracy theory than anything else to me.

Jim.


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## Jim2007 (3 Jul 2011)

onq said:


> The Bank for International Settlements, it operates - with no mandate - as the Central Bankers Bank, so far as I have been able to determine.
> 
> http://en.wikipedia.org/wiki/Bank_for_International_Settlements
> 
> ...



Seriously, you consider this to be reliable research???  The Wikipedia article is as expected well done, but the rest... well lets just say I hear Black helicopters in the distance.

Jim.


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## Jim2007 (3 Jul 2011)

onq said:


> I understand that banks used derivatives amongst other means to fudge  compliance with the previous limit for fractional reserves set by the  BIS.



Where is the reference for this statement?  I know that Credit Suisse have made  a proposal to use  for Basle III, but I'm not aware of their use in the past???

Jim.


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## onq (3 Jul 2011)

Jim,

I realise only too well that you can live beside something and not know whats going on.

Here is a past thread on AAM started by me in which I posted the text of an e-mail to the BIS asking them for clarification of their role.

http://www.askaboutmoney.com/showthread.php?t=119469
11-08-2009, 03:23 PM                                       

In relation to the black helicopters, all you have to do is follow the money and see who is benefiting from the pressures on the system right now.

Are the large corporations and the banks being targeted by taxation to relieve the debt undertaken without any mandate from their electorates by supposedly sovereign governments? No.

Are small businesses getting the liquidity they were promised as a result of taking on board this insupportable debt? No.

Here is a link to a story about what is starting to happen in the United States right now as individual states start to help themselves after realizing that the government has only helped the larger conglomerate banks.

http://www.opednews.com/articles/How-the-Bailout-Killed-Loc-by-Ellen-Brown-110702-255.html

I am not interested in conspiracy theory.

I am trained to look at the facts, however unpalatable they may be, and make professional decisions, regardless of any preconceptions I may have.

One thing I've learned over time is that people who choose to rebut facts by attacking the messenger as opposed to countering the arguments, are engaging in a political exchange, not a debate.

If you know about the BASLE accords then you know what I know.

What you seem to be missing is an appreciation of the effects of these accords given the banking situation in place at the time.

Either the likely effects were known about or they were not.

Given the contacts in the BIS they could not have been unaware of the degree of governance of the local banks, the central banks and the money markets.

Yet they pressed ahead with implementing the accords.

Is none of this making sense to you Jim?

ONQ.


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## onq (3 Jul 2011)

Jim2007 said:


> I have no connection what so ever to the BIS...  apart from the fact that I used to walk past it's head quarters in Basle on my way to work for 4 years.
> 
> On the other hand, over the years, I have, as the author of various banking software applications, been involved in several discussions about implementing it's requirements known as Basle II and now Basle III, so I am more aware than most of it's importance in the banking community.  And as I have already said I have yet so see any credible argument to suggest that the crises was caused by the BIS.
> 
> ...



Is business week a sufficiently credible source?

http://www.businessweek.com/magazine/content/08_17/b4081083043159.htm

And since Wiki seems to be an acceptable source I'll include this general comment.

http://en.wikipedia.org/wiki/Basel_II

If these geniuses are allowed raise interest rates after their hamfisted handling of the banking crisis it will ruin the world economy.
IMO this is a deliberately set up plan by the smartest money men in the room to beggar the middle classes and create wealth for themselves.
If that happens, and it is entirely foreseeable to a layperson like me and entirely unbelievable to suggest this wasn't planned, then the Swiss may have more surprises coming.

ONQ


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## onq (3 Jul 2011)

Jim2007 said:


> Where is the reference for this statement?  I know that Credit Suisse have made  a proposal to use  for Basle III, but I'm not aware of their use in the past???
> 
> Jim.



I'll use the same business week reference I included in another post.

http://www.businessweek.com/magazine/content/08_17/b4081083043159.htm

I wasn't specifically referring to Irish banks, but I'm sure they played a similar game.

I agree with your other comment - Irish Banks went from lending money prudently to selling money unwisely to shoveling money negligently at people.
I say "negligently" because they are supposed to be the professionals who were supposed to operate at a higher level and have a duty of care to the public.
The current mess where the public, via a disgraced previous government, have taken on private bank debt is the result of them not having discharged their duty of care.

My other thread starter on the repudiation of Odious Debt is relevant.

ONQ.


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## Jim2007 (3 Jul 2011)

onq said:


> I'll use the same business week reference I included in another post.
> 
> http://www.businessweek.com/magazine/content/08_17/b4081083043159.htm
> 
> I wasn't specifically referring to Irish banks, but I'm sure they played a similar game.



Well first of all this article does not support your claim that CoCos where being used....

And secondly it disingenuously argues that because the banks have failed to follow the T1 guidelines set out in Basle II, it is now the BIS's fault that there is a problem!!!  

Had they indeed followed the guidelines they would have had a been in better situation to survive the fall out - For example UBS had a T1 rate of about 14/16% when it took the hit of $50b and as a result it was able to cover about $45b itself before needing an extra $6b from the Swiss government - in comparison look at what happened to US/UK/Irish banks, with their very low T1 rates... 

Jim.


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## Jim2007 (3 Jul 2011)

onq said:


> If these geniuses are allowed raise interest rates after their hamfisted handling of the banking crisis it will ruin the world economy.
> IMO this is a deliberately set up plan by the smartest money men in the room to beggar the middle classes and create wealth for themselves.
> If that happens, and it is entirely foreseeable to a layperson like me and entirely unbelievable to suggest this wasn't planned, then the Swiss may have more surprises coming.
> ONQ



First of all decision making within the BIS is in fact the decisions of it's 60 members, some very powerful ones such as the Fed, the ECB and the Bank Of England and to suggest that these bodies would accept being pushed around by the staff of BIS is just not credible.  And Secondly, it is the Fed, the ECB and the Bank of England that are the main drivers when it comes to setting interest rates and who in fact have the authority to do so.

Jim.


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## Jim2007 (3 Jul 2011)

levelpar said:


> What a load of Bull !



Well whatever else I thing potential borrowers should pay attention to this comment within the article and borrow accordingly:

"It is considered that a normal worker will be able to pay back 2.5 times his income over the course of his working life. In the case of a couple, who would typically buy a house, the limit was 2.5 times plus one times spouse’s salary. This meant with an often sizeable deposit, a couple could afford to buy a house with the help of a mortgage."

Jim.


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## onq (4 Jul 2011)

Jim2007 said:


> First of all decision making within the BIS is in fact the decisions of it's 60 members, some very powerful ones such as the Fed, the ECB and the Bank Of England and to suggest that these bodies would accept being pushed around by the staff of BIS is just not credible.  And Secondly, it is the Fed, the ECB and the Bank of England that are the main drivers when it comes to setting interest rates and who in fact have the authority to do so.
> 
> Jim.




Are you suggesting that, far from setting policy, the BIS is merely a figurehead organization for the three largest groupings of banking interests in the world?

ONQ.


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## onq (4 Jul 2011)

Jim2007 said:


> Where is the reference for this statement?  I know that Credit Suisse have made  a proposal to use  for Basle III, but I'm not aware of their use in the past???
> 
> Jim.



I hadn't known about CoCos before your post.

Now that I do I can go hunting for more information as to their use.

Thanks.

ONQ.


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## onq (4 Jul 2011)

DerKaiser said:


> Nice simple article.  Shouldn't be criticised for keeping it simple.
> 
> Banks lent up to 8 times income on house purchases.
> 
> ...



You're going on assumptions, not facts.

The banks didn't need to adversely affect their cash reserves in absolute terms - they could have borrowed the money they lent locally on the international credit market.

ONQ.


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## Purple (4 Jul 2011)

onq said:


> It appears that it is precisely this lack of competence that is supposedly guiding the BIS and the people Jim tells me it fronts for - the ECB, the FED and the IMF.
> Or so they would have us believe.
> 
> ONQ.


What do you think the real story is?


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## onq (4 Jul 2011)

There is no mystery to this, Purple.

The official assessment is that all this [repeated boom and bust cycles] happens through human error and greed in a free market system.
This is based on certain assumptions about the free market system which aren't well supported in my opinion.

An unregulated free market is the unmonitored playground of corrupt corporations seeking to accumulate wealth.
To support this thesis, just follow the money and see who gains and who loses in the medium term.
The results tell the real story.

ONQ.


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## Purple (4 Jul 2011)

onq said:


> There is no mystery to this, Purple.
> 
> The official assessment is that all this [repeated boom and bust cycles] happens through human error and greed in a free market system.
> This is based on certain assumptions about the free market system which aren't well supported in my opinion.
> ...



So you are of the opinion that the international financial crisis was manufactured by international global capitalists.
If that is the case it was a complex and high risk strategy which would have required decades of planning as well as considerable and coordinated  political control of the governments of major countries in order to influence policy. Who are these people, what events did they influence and how did they manufacture the suitable outcomes?


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## millieforbes (4 Jul 2011)

onq said:


> Are you suggesting that, far from setting policy, the BIS is merely a figurehead organization for the three largest groupings of banking interests in the world?
> 
> ONQ.



I always understood that, at a high level, BIS was responsible for policy setting but not implementation; for example drafting the Basel II accord, presiding over the negotiations and publishing the final policy but individual regulators in individual countries were responsible for implementing and policing the policy. The effectiveness of the implementation of the policy is, of course, determined by the competence of the organisations implementing the policy, including in our case the Financial Regulator.

Looking at the Irish regulator, you have a small organisation trying to effectively police all the banks, including all the hundreds of small subsidiaries of international banks operating out of the IFSC - as well as the AIBs and Bank of Irelands, and covering all types of regulation varying from consumer credit acts to the Basel II accord.

At the heart of sophisticated approaches to Basel II credit risk requirements (credit risk making up most of the capital requirements for Irish banks) are models designed to predict the likely losses on loans. This is where the equivalent of the actuaries come in - though in the case of banks they are typically statisticians rather than actuaries. The statisticians build these models which convert the banks loans into Risk Weighted Assets. BIS dictates that banks hold 8% of these RWAs as capital but the local regulators are responsible for ensuring the RWAs have been robustly calculated. The banks wanted to lend more money so it was in their interest to push down the estimation of RWAs. The regulators reviewed this. In the FR the team responsible for these reviews was probably no more than 10 people, and these highly specialist model reviews were not their only work.

IMO where the BIS failed here was in failing to check that the local regulators who were responsible for implementing their policies were actually competent in so doing.


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## onq (4 Jul 2011)

A very succinct and informative post  - thanks.

More future reading for me to catch up on.

ONQ.


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## Chris (5 Jul 2011)

onq said:


> There is no mystery to this, Purple.
> 
> The official assessment is that all this [repeated boom and bust cycles] happens through human error and greed in a free market system.
> This is based on certain assumptions about the free market system which aren't well supported in my opinion.
> ...



But we had and have nothing even remotely resembling a free unregulated market. The financial industry is one of the most heavily regulated markets in the world and no financial institution would want to change it. It is a total myth that there has been more deregulation than regulation in the last 20 years. See [broken link removed] and page 17 of [broken link removed]
I agree with you that the boom bust cycle is a human creation, but not out of deregulatory or greedy behaviour. Fractional reserve central banking is at the very core a corrupt system. If you follow the money you will see that those that gain the most from a restricted, heavily regulated and fraudulent fractional reserve system are:
1) Governments and their politicians
2) Banks
3) Favoured industries of banks and government

If you really want to understand how the boom bust cycle is created do some research into the Austrian Business Cycle Theory (http://wiki.mises.org/wiki/Austrian_Business_Cycle_Theory).


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## onq (5 Jul 2011)

Chris,

I think most people looking at the way over the counter trading is unregulating, the disastrous lack of monitoring or governance which has brought us to this pass, plus the lack of taxation on bank transactions would probably deny your assertion.

I however, am not most people. I have no need to vent in a knee-jerk reaction. I'll read your links and add them to what I'm considering at the moment. And thank you for them.

Then I'll comment or ask for clarification.

ONQ.


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## Jim2007 (5 Jul 2011)

Chris said:


> The financial industry is one of the most heavily regulated markets in the world and no financial institution would want to change it. It is a total myth that there has been more deregulation than regulation in the last 20 years.



I would not agree with this at all, there was deregulation, but it was very subtle and I doubt most of the law makers involved realised the consequences of their actions.  The repeal of the Glass-Steagall act and similar legislation else where fundamentally changed how banks are managed.  The major consequence of the repeal was that the investment banking (IB) arm of most large banks go access to the main capital of it's parent bank and as a consequence could now under take high risk schemes not seen since the 1920s - why the act was introduced in the first place!  The major scheme was of course the sub-prime mortgage securities that were being peddled at a crazy rate.

I keep harping back to UBS, but so far it is the only one I know of who has been investigated and the results made public.  In their case they had a very solid wealth management and domestic banking business that generated cash year after year and at the same time it had an IB subsidiary that had good years and really bad ones, but it could not really do too much damage to the over all well being of the bank, because it's capital was capped at about $10b to start with.  Then can the "One-Bank" concept around 2000 when all could be rolled into one and the IB side suddenly got access to the whole capital of the bank, possibly 10 times more than they had before.  And so the game began that eventually cost them $50b.  The other big banks were to a greater or lesser extend playing the same game and it most definitely had a big impact on the whole outcome, because it allowed off balance sheet financing to a level never see before.

World wide everyone is now trying to put the jenny back in the bottle, but it is going to take an awful lot of effort to do so.

Jim.


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## onq (5 Jul 2011)

Why not call it gambling and be done with it, Jim?
Enforce restrictions for the Public Good.
Its hardly banking.

ONQ.


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## Chris (6 Jul 2011)

onq said:


> Chris,
> 
> I think most people looking at the way over the counter trading is unregulating, the disastrous lack of monitoring or governance which has brought us to this pass, plus the lack of taxation on bank transactions would probably deny your assertion.
> 
> ...


Simply suggesting that regulation is the solution to all the problems is very simplistic. It completely ignores all the damage done by regulation. The costs involved with regulatory compliance are huge and have created an industry that receives no new competition. This is why you never here banks in uproar about new regulations (except maybe caps on pay and bonuses), the more regulation there is the less they have to fear new competition.
When you have an industry that is not subject to new competition, and where it is impossible for a small new company to start business, you eventually end up with an ever decreasing number of very large companies. And this is what gave birth to the "too big to fail" ideology. As well intentioned as regulations may be, they have disastrous consequences leading to a vicious circle of more regulations causing more problems resulting in more regulation.
What caused this crisis is not the dealing in unregulated over the counter transactions. It was the monetary inflation that was actively funneled into the property market. In the US it was the government entities Fannie Mae and Freddie Mac, while here in Ireland it was tax incentives to builders and property buyers.
You are absolutely right to not just take some strangers word from a discussion forum for granted, and I think you will get a broader insight into the whole mess we are in. The reason I was skeptical of the immediate identification of the cause of the crisis was that it was spouted out with too much consensus by politicians. It is very convenient to simple blame an act of omission and the third party than to acknowledge your own mistakes.



Jim2007 said:


> I would not agree with this at all, there was deregulation, but it was very subtle and I doubt most of the law makers involved realised the consequences of their actions.  The repeal of the Glass-Steagall act and similar legislation else where fundamentally changed how banks are managed.  The major consequence of the repeal was that the investment banking (IB) arm of most large banks go access to the main capital of it's parent bank and as a consequence could now under take high risk schemes not seen since the 1920s - why the act was introduced in the first place!  The major scheme was of course the sub-prime mortgage securities that were being peddled at a crazy rate.
> 
> I keep harping back to UBS, but so far it is the only one I know of who has been investigated and the results made public.  In their case they had a very solid wealth management and domestic banking business that generated cash year after year and at the same time it had an IB subsidiary that had good years and really bad ones, but it could not really do too much damage to the over all well being of the bank, because it's capital was capped at about $10b to start with.  Then can the "One-Bank" concept around 2000 when all could be rolled into one and the IB side suddenly got access to the whole capital of the bank, possibly 10 times more than they had before.  And so the game began that eventually cost them $50b.  The other big banks were to a greater or lesser extend playing the same game and it most definitely had a big impact on the whole outcome, because it allowed off balance sheet financing to a level never see before.
> 
> World wide everyone is now trying to put the jenny back in the bottle, but it is going to take an awful lot of effort to do so.


Glass-Steagall is the only deregulation that had any significant impact on the crisis. But there were countless new regulations that were introduced in the last 10 years that mean that overall the burden of regulation in the financial industry increased, not decreased. 
As you seem to know quite a bit about UBS I am quite happy to hear you "harping" on about them, it is always good to get insights from people with more of the know.
But do you think that UBS or any other bank would have taken on the same risks if they did not have governments and central banks to fall back on? Lenders of last resort and too big to fail policies gave banks the ideas of mitigated risk.




onq said:


> Why not call it gambling and be done with it, Jim?
> Enforce restrictions for the Public Good.
> Its hardly banking.


How about introducing a law, ideally constitutional, that strictly forbids governments to bail out banks through taxpayers? The main reason banks took on excessive risk is because of the precedence of implicit and explicit guarantees and bailouts. If banks really had to fear going out of business then their risk calculations would be very different.


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## Jim2007 (6 Jul 2011)

onq said:


> Why not call it gambling and be done with it, Jim?
> Enforce restrictions for the Public Good.
> Its hardly banking.
> 
> ONQ.



Well it is definitely high risk and should be walled from the rest of the bank, but we still need to have it around so eliminating it all together is not an option.  

For instance they are the ones that underwrite the raising of capital in the markets by real businesses, they provide the the frame work for financing large infrastructure projects, provide hedging on exchange rates for business transactions and so on.  These are the kind of activities that no standard bank would be willing to undertake and yet without it business activities and infrastructure project would be very difficult to undertake.

Jim


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## Jim2007 (6 Jul 2011)

Chris said:


> Glass-Steagall is the only deregulation that had any significant impact on the crisis. But there were countless new regulations that were introduced in the last 10 years that mean that overall the burden of regulation in the financial industry increased, not decreased.



Yes but what an impact!  And it does not matter how much you increase the burden, if you fail to monitor the real risks.



Chris said:


> As you seem to know quite a bit about UBS I am quite happy to hear you "harping" on about them, it is always good to get insights from people with more of the know.  But do you think that UBS or any other bank would have taken on the same risks if they did not have governments and central banks to fall back on? Lenders of last resort and too big to fail policies gave banks the ideas of mitigated risk.



First of all there was no precedence for bail outs in Switzerland, in fact banks of often been allowed to fail in the past and even now there are no government deposit guarantees similar to anything offered in the EU.  The biggest failure in the past was the Union Bank Of Switzerland, know as old UBS!  In this case it lost a major part of their capital investing in LTCM and was basically insolvent.  It was taken over by one of the other 3 large banks known as Swiss Bank Corporation and the new enterprise was called the United Bank Of Switzerland - New UBS.  In general Switzerland is not a land of hand outs - there is no support the long term unemployed, we have no public health service and so on - so no I don't think that was what happened.

But if you give bankers access to cheap finance and pay bonuses on 12 months performance basis rather than on a long term view, you bet they'll come up with some very high risk and complex products.  Now if you are the one trying to manage this complexity, a nice simple model that produces Yes/No answers or Red/Green flags, take you pick, is a very attractive proposition, especially if you really don't understand what is going on!  And according to the report that is what happened!

Although the source of cheap finance was different, you had the same situation with the Irish banks - cheap finance, bonuses on a 12 months basis and  I'm sure there were plenty of models produced to show that things could never get as bad as they did.  Just imagine for a minute, that you're a risk office at one of the Irish banks during this period and you spend a few weeks building a model which assumes house prices will fall by 50%, unemployment will grow to 12% and the economy will contract by say 5%.  What do you thing will happen when you present it to the banks risk committee?  You'll be laughed out of the room because no one will believe that it could ever happen and yet it does.

Over the past 20 years I've become far more interested in the behavioural aspects of finance than anything else because it plays a major part in understanding what really goes on.  Bank CEOs get to the top not because they have great knowledge of maths and the technicalities of banking, but because they are good corporate politicians.  And the last think they going to do is admit that they don't understand the models being used to manage the bank!   



Chris said:


> How about introducing a law, ideally constitutional, that strictly forbids governments to bail out banks through taxpayers? The main reason banks took on excessive risk is because of the precedence of implicit and explicit guarantees and bailouts. If banks really had to fear going out of business then their risk calculations would be very different.



It all sounds fine in theory, but when you come to the banks that are "Too big to fail" it is a different story...  Lets assume for a minute that it did actually happen, day one the bank staff walks of the job since they are not going to get paid, within 24 hours the credit and payments system will blow out, you will not be able to access your cash at the ATM nor use your credit card...  next of course comes the lack of a salary since there is not way for a company to pay it either and so on.  Property etc... will have a value of zero because there is no way to dispose of it and so on.  Irish firms will find it almost impossible to export anything and so on.  The government and large corporations will have difficult raising finance on the markets because who would give credit to a country that can't even run a basic banking system???  Even the Swiss realised that they could not afford to let UBS fail and so they had to do a bail out as well.

Yes we can let small banks fail, but the "Too big to fail" are a different story - we'll just have regulate them to a much greater extend.

Jim.

PS: No time for editing tonight, hope it make some sense in any case.


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## Firefly (7 Jul 2011)

Jim2007 said:


> Yes we can let small banks fail, but the "Too big to fail" are a different story - we'll just have regulate them to a much greater extend.



Hi Jim,

What are your thoughts on breaking up AIB & BOI into smaller banks so they could be let go if they failed? 

Firefly.


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## Chris (7 Jul 2011)

Jim2007 said:


> First of all there was no precedence for bail outs in Switzerland, in fact banks of often been allowed to fail in the past and even now there are no government deposit guarantees similar to anything offered in the EU.  The biggest failure in the past was the Union Bank Of Switzerland, know as old UBS!  In this case it lost a major part of their capital investing in LTCM and was basically insolvent.  It was taken over by one of the other 3 large banks known as Swiss Bank Corporation and the new enterprise was called the United Bank Of Switzerland - New UBS.  In general Switzerland is not a land of hand outs - there is no support the long term unemployed, we have no public health service and so on - so no I don't think that was what happened.


But would you not also agree that in relative terms Switzerland was one of the least affected countries in the credit crisis? The fact that Switzerland does not have the same track record of bailouts as other countries does very much show in Swiss banks' behaviour towards lending. I read one of your posts on another thread about getting a mortgage in Switzerland and it seemed to me that it was very difficult, indicating that banks are very risk averse in this sense.



Jim2007 said:


> But if you give bankers access to cheap finance and pay bonuses on 12 months performance basis rather than on a long term view, you bet they'll come up with some very high risk and complex products.  Now if you are the one trying to manage this complexity, a nice simple model that produces Yes/No answers or Red/Green flags, take you pick, is a very attractive proposition, especially if you really don't understand what is going on!  And according to the report that is what happened!


I absolutely agree, cheap credit was at the heart of the problem, along with an inflated money supply.



Jim2007 said:


> Over the past 20 years I've become far more interested in the behavioural aspects of finance than anything else because it plays a major part in understanding what really goes on.  Bank CEOs get to the top not because they have great knowledge of maths and the technicalities of banking, but because they are good corporate politicians.  And the last think they going to do is admit that they don't understand the models being used to manage the bank!


Very interesting view point and I certainly see how you come to that conclusion. Banking and government are more intricately intertwined than the majority of people understand. Banks gain from cheap credit, inflated money supply and the ability to create money out of thin air, while governments  benefit from a guaranteed buyer of bonds. It is no surprise that top bankers are political figures rather than shrewd business people. All the while it is the average person that gets screwed by this setup.



Jim2007 said:


> It all sounds fine in theory, but when you come to the banks that are "Too big to fail" it is a different story...  Lets assume for a minute that it did actually happen, day one the bank staff walks of the job since they are not going to get paid, within 24 hours the credit and payments system will blow out, you will not be able to access your cash at the ATM nor use your credit card...  next of course comes the lack of a salary since there is not way for a company to pay it either and so on.  Property etc... will have a value of zero because there is no way to dispose of it and so on.  Irish firms will find it almost impossible to export anything and so on.  The government and large corporations will have difficult raising finance on the markets because who would give credit to a country that can't even run a basic banking system???  Even the Swiss realised that they could not afford to let UBS fail and so they had to do a bail out as well.


But what you are describing is a chaotic bankruptcy, which doesn't have to be the case. No matter how big a company it is possible to have an orderly wind down and liquidation.



Jim2007 said:


> Yes we can let small banks fail, but the "Too big to fail" are a different story - we'll just have regulate them to a much greater extend.


All that will be achieved with more regulation is that you will end up with ever increasing number of too-big-to-fail banks, which only exacerbates the problem and dependence on a few companies. It is also very simplistic to suggest that quantity of regulation automatically translates into quality of regulation and a solution to the problem. As I have stated before, it is a vicious circle of regulations causing concentration of the market, which causes an increased risk to the entire system, ultimately leading to more regulation ad infinitum.


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