Monday, December 21, 2009

In Search of Risk Free Banking

As the linchpin of the global financial system, can banks be ever run in a risk free manner?

By: Ringo Bones

Maybe it was the sage advice of Robert “Bob” Diamond, chief executive of Barclays Capital, on a BBC September 15, 2009 interview that there is no such thing as banking without risk. It readily cast a worm of doubt over governments’ frantic but somewhat futile attempts to formulate ways to prevent another global credit crunch from ever happening again. And the world’s leading economist still has a consensus that risks are an inherent part of a typical banking institution’s business structure. Given the somewhat inevitable status quo, can we even at least minimize banking risk down to as close to zero as humanly possible?

Our current version of the Basel Accord, in which a thoroughly studied financial research allows banking regulators to establish the right amount of minimum capital requirements to minimize inherent banking risks. Was set up to achieve a goal of globally interconnected banks whose inherent risk is as close to zero given our current financial systems know-how. Unfortunately, the accord’s current incarnation was set-up a few years before the US credit crunch went global and we’ll before we knew the root causes of. Thus making it likely that the current Basel Accord could be overhauled before the end of 2010 to make way for quantitative easing schemes and monetary policy guidelines that will prevent our current global recession from ever happening again. In other words, a better way to minimize overall financial risks of banks deemed to big to fail. But are there other ways to further minimize banking risks?

After consulting with the world’s leading economists, financial regulators had recently proposed the establishing of a “living will” for banks so that in case of a bank failure / bankruptcy, banks can be easily broken up – liquidated if you will – so that their assets can be more efficiently used elsewhere. Especially during the event of a major financial crisis like that event that brought down Lehman Brothers back in September 2008. A bank’s “living will” could be set up in advance to facilitate the fiscally expedient liquidation process of failed banks, so that there assets could be effectively used for keeping a major financial crisis from going out of control. A well-structured breaking up process of a failed bank when it files for bankruptcy could be a big help to governments during times of a widespread economic crisis. Where the speedy formulation of fiscally sensible quantitative easing and monetary policy schemes are needed to keep a major economic crisis at bay.