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.