US Equity markets faltered last week due, in part, to more problems among European banks. This time it was Irish banks, but the Spanish ones are on everyone's mind.
Between last April's Greek bank crisis and the current concerns, pundits are now calling into question the ECB's bank stress tests. A recent Wall Street Journal article noted how much country-specific latitude exists for bank capital requirement determination. Differences in housing markets, for example, allows banks in different countries to allocate capital differently for mortgage loans.
On the face of it, this sounds problematic. It seems that, as with US banks, the Basel required capital determination methodologies are sufficiently pliable to allow for under-capitalization.
Another important criticism of capital regulations, generally, is that they are pro-cyclical. Typically backward-looking, using past volatilities as inputs, capital requirements penalize recently-troubled asset classes, while leaving those potentially ready to cause a problem with lesser capital allocations.
But, more generally, it's useful to consider what several decades of attention by global financial regulators have achieved in terms of preventative bank capitalization.
That is to say, not much. In fact, the CDO mess occurred under full implementation of the best regulatory capital approaches that wealthy countries could muster over the years since the LTCM meltdown of 1998.
Doesn't inspire investor confidence in our global financial systems, does it?
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