.. (the
solutions are) more capital per asset and less leverage."
Yet, the Basle committee of bank supervisors has based the new capital
regime for banks and investment firms, known as Basle 2, on the banks'
internal measures of risk and credit scoring. Computerized VAR models
will, in all likelihood, become an official part of the quantitative
pillar of Basle 2 within 5-10 years.
Moreover, Basle 2 demands extra equity capital against operational
risks such as rogue trading or bomb attacks. There is no hint of the
role insurance companies can play ("contingent equity"). There is no
trace of the discipline which financial markets can impose on lax or
dysfunctional banks - through their publicly traded unsecured,
subordinated debt.
Basle 2 is so complex, archaic, and inadequate that it is bound to
frustrate its main aspiration: to avert banking crises. It is here that
we close the circle. Governments often act as reluctant lenders of last
resort and provide generous safety nets in the event of a bank
collapse.
Ultimately, the state is the mother of all insurers, the master policy,
the supreme underwriter. When markets fail, insurance firm recoil, and
financial instruments disappoint - the government is called in to pick
up the pieces, restore trust and order and, hopefully, retreat more
gracefully than it was forced to enter.
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