Institute for Financial Transparency

Shining a light on the opaque corners of finance


BoE lists reasons you are suppose to think financial system is safer

As we approach the tenth anniversary of the financial crisis, the Bank of England published the reasons why you are suppose to think the financial system is safer.

It asks how are banks safer.  The number one answer is banks have more book capital.

Even if that is true, no Too Big To Fail bank was forced to use 100% of its book capital in 2008 or 2009 to absorb the losses on the bad debt it was exposed to.

Higher levels of book capital sound great in theory.  In reality, book capital will never be used to absorb losses.  So it does nothing to make banks safer.

The BoE goes on to ask how is the rest of the financial system safer.  The number one answer is financial regulators are engaged in macro-prudential regulation and are scanning the financial system for systemic risk.

Even if this is true, regular readers know financial regulators cannot see the systemic risk that will trigger the next financial crisis because it is hiding in the Blind Betting quadrant of the Information Matrix.  Financial regulators are no better than any other market participant at assessing the risk of an opaque security.

The BoE goes on to ash how have taxpayers been protected.  The number one answer is adoption of new and improved resolution authorities.

Even if this is true in theory, bank regulators will never resolved a Too Big to Fail bank during the middle of a financial crisis.  They will bailout this bank first and hope to have the necessary political support to unwind the bank as part of the crisis mop up operation.

Consider for a moment, RBS still exists.  Wouldn’t you think this resolution authority should be used on RBS?

In short, despite a tremendous amount of sound and fury of regulators thrashing about in the regulatory weeds, nothing of significance has been done that will actually make the financial system safer from the perspective of the individual taxpayer.