Sunday, September 12, 2010

The Meaning of Basel: Stiglitz

Joseph E. Stiglitz
“It’s a move in the right direction. One should see these actions as part of trying to correct what is clearly a dysfunctional banking sector.”
“While it’s understandable, given the weaknesses and the failings of the banking system, that one would want to be slow in introducing these increased capital requirements, delay is exposing the public to continued risk. Given the high levels of payouts in bonuses and dividends, it seems a little unconscionable to continue putting the public at risk with an argument that they cannot more rapidly increase their own capital.”
“The banks have complained about the fact that increased capital adequacy requirements of this kind would increase the cost of capital that firms would have to pay. But one should recognize that through the bailouts that have been repeated all through the world, not just during this crisis, the public has in effect been subsidizing the banking sector and that represents a very large distortion in the financial system. If the cost of capital is higher as a result, it’s just undoing a distortionary subsidy.”
“Any assessment of the full impact depends obviously in part on the accounting standards. If banks are allowed to continue the kind of deceptive accounting where they can treat non-performing or impaired mortgages as if they were fully performing, it undermines the effectiveness of these attempts to ensure that banks are adequately capitalized.”
The collapse of Lehman Brothers Holdings Inc. in 2008 “provides an example par excellence” because of the gap between its stated capital and actual capital when it went bankrupt.

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