Economists: Another disaster is on the way

Economists gathered at the annual meeting of the American Economic Association in Denver say global financial reforms aren’t nearly enough to avert another disaster, according to  a January 9, 2011, story by The Wall Street Journal.

One issue is bank reliance on short-term borrowing.

From the story:

Banks such as Lehman Brothers and the U.K.’s Northern Rock failed in part because they couldn’t raise money to replace short-term debt coming due. Douglas Diamond, an economist at the University of Chicago, noted that while regulators are requiring banks to keep more cash on hand to cover their debts, they have done little to prevent the kind of short-term borrowing that can lead to trouble. …

“You need some way of dealing with the fact that there could be contagious runs in these markets all at once,” said Viral Acharya, a finance professor at New York University’s Stern School of Business.

Another issue is inadequate capital requirements:

Recent history suggests that a capital requirement of 7% won’t be enough to fend off bailouts. Many banks that required government support during the latest crisis, including the Royal Bank of Scotland and Citigroup, had capital levels exceeding 7% just before trouble hit in the third quarter of 2007.

Beyond that, the sheer complexity of international rules can make reported capital ratios suspect. Risk-modeling errors alone, said Mr. Haldane, can lead to variations of several percentage points.

The story does not mention repurchase agreements.


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