National Institute of Economic and Social Research has held a financial forum today on “Financial Markets in the Aftermath of the Basel III”, which mainly focused on the “Future of Bank Regulation”, in Westminster,London.

The seminar that was chaired by Professor Charles Goodhart,an institute governor and former member of the council, and led by Professor Ray Barrell, Professor Philip Davis. Dr Dilruba Karim and research fellows Tatliana Fic, Rachel Whitworth who have presented the institution’s recent research.The researchers have looked for the answers of four vital questions in their debate:

1.Will controlling the bank size make the system more stable?

2.Will increasing the quantity and quality of reduce the risk?

3.Will controlling the credit improve the financial stability?

NIESR's Research Fellow Rachel Whitworth(from left to right),Dr Dilruba Karim,Professor Charles Goodhart,Professor Ray Barrell,Professor Philip Davis and Research Fellow Tatliana Fic at the seminar on "The Future of Bank Regulation" in WEstminster,London.

4.Will regulation change damage house price cycle?

In his presentation on “Is there a link from bank size to risk taking?”,Professor Ray Barrell said that they have found a strong relationship between bank size and risk as measured by charge offs. Larger banks make larger charge-offs as a proportion of their asset .

Too big to fail” insurance in the regulation, which brings larger banks higher loss rate, encourages larger banks to take bigger risks in the competition. However Barrell thinks  that larger banks should have lower loss rates. Having more Tier 2(subordinated debt issuance) which increases charge offs and guarantees bailouts for larger banks another factor that was exploited by big banks in the financial crisis of 2007-09.On the other hand Tier 1(risk absorbing capital that is a shareholder asset) reduces the charge offs .Therefore regulators  who increase Tier 1 ratios and reduce the scale of large banks will produce industries less prone to big failure, according to  Barrell.

Professor Philip Davis opened a debate on “Advances and Shortcomings of Basel III” and said that Basel III that is outlined in December 2010 will be gradually introduced within the next a few years. However Davis added that they are as an institution concerned about ongoing risks posed by the current proposals.

Basel III has higher quantity and better quality of capital to reduce solvency risk but on the other hand it needs higher capital to reduce banking crisis risk to acceptable levels. It doesn’t eliminate Tier 2 but only reduces. Common equity will be 7% in Basel III. It is going to support larger banks as they are systematically more dangerous to the economy, said Professor Davis.

“Estimation equilibrium house prices for the UK” was discussed by Rachel Whitworth in the end of the forum. According to Whitworth loan-to-value and loan-to-income ratio are the policy instruments to detect a bubble in the housing market and mitigate it .

The research shows that key driver of house prices is per capita real disposable income and loan-to income ratio. Loan –to-value is not that significant.

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Comments
  1. Malcolm says:

    Interesting, as usual… I just watched INSIDE JOB for the second time in two days, and the case is laid out quite clearly. This is an extremely well made documentary about the 2008 Wall Street debacle. The story is a complex set of issues and circumstances that were constructed by an unregulated industry, but in many cases the laws were there but were not enforced. More than that, the laws that are there should have a large number of those responsible in jail and that is not likely to happen. The reason for that is that they are still ‘serving’ in the government and ‘managing’ the industry that pays them so well.
    The rating agencies play their critical part: Standard & Poors, Moody’s, and Fitch. They gave very high risk paper AAA ratings which is how this paper was sold to pension funds, etc.
    Third point: many of the high visibility ‘experts’ that played along with the scam are deans of major ‘ivy league’ business schools, like Harvard and Columbia universities… there are those that did not, and they have consulted to the presidents of the US over the years, but the ones that got listened to were the thieves.
    This is one story where the facts speak quite loudly if only people would listen.

  2. Jimbo says:

    Economics, certainly not my strong point but I thought this half-hour
    discussion, of interest – especially, as it was 1999!

    http://www.bbc.co.uk/programmes/p00545kv

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