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Posts Tagged ‘banking crisis’

Only in the technical financial press has any mention been made so far to the impact of the ludicrous “scientific precision” of Basel 2 EU directives. They have finally kicked their inventors in the teeth, as widely predicted by economists and others at the time.

Officially directives 2006/48 and 49, Basel 2 demands that banks and other financial institutions apply an EU-formulated “Risk Assessment Model” at the end of each and every day’s trading to show if it is solvent. If not, it must inform the authorities immediately and stop trading. That of course is no problem in a rising market as we have generally seen in recent years.

But it is a huge problem in a highly volatile or falling market, not least because the model fails to take any account of inevitable changes in market sentiment. Neither is the short-term impact of new information factored in, regardless of its accuracy or inaccuracy. The model also ignores the essential underlying worth of assets.

In the UK, both Northern Rock and Bradford and Bingley fell foul of Basel 2. It threatens the theoretical solvency of all major banks in the EU in a falling market, and accelerates the problem exponentially.

This banking crisis is is far worse than it should have been, not least because the ivory-tower bureaucrats in Brussels ignored sound advice based on market experience. We are all now reaping the whirlwind.

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So whilst the rest of the world begins to fear genuinely for their savings and jobs, over in the European Parliament asylum last week it was business as usual. Items up for discussion were such riveting subjects as more ‘harmonised’ EU rules about teacher training, standards for waste reporting, for colourants in medicines, for roadworthy tests, shipping and obesity, to name but a few. The EU must keep up its programme of regulating everything that moves, or in the case of the obese, those who presumably don’t.

When they finally got round to discussing the financial crisis, you can no doubt guess how they were thinking about it – they clearly had not been regulating enough. The EU has already imposed 42 separate directives on the finance industry. Now they want even more rules: rules to make banks hold more capital, (see other posting on this blog), on rules to make financial deals more transparent, rules to control how risks are assessed, rules to limit the bonuses of finance company bosses. And so on. 

This all demonstrates how the EU has spectacularly missed the point as usual. It must be obvious that all their  rules so far mainly designed to achieve the fabled single market in financial services and to stamp out money laundering, have done nothing to make the banking industry safer. Making more future rules won’t help us out of the current crisis.

It should be obvious that the EU cannot continue for ever with its massive legislative programmes, in the financial sector or any other. For the over-riding effect of all their regulations is to add costs and to crush the productive activity on which our prosperity depends.

But do not expect them to notice this because making directives and regulations is the only thing they do. And when push comes to shove, as Angela Merkel demonstrated last week, they are powerless to prevent a country like Germany, deciding it should not be bound by what the rest of the EU Finance ministers decided not 24 hours before.

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