FINS T02A Recap - FINS 5550 / FINS 3650 International...

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FINS 5550 / FINS 3650 — International Banking Topic 2A Recap Premise The lectures are intended to provide structure, on the basis of which you will be able to understand and interpret primary sources. Thus each lecture is the preparation for the suggested readings, not the other way around. These recaps are intended to reinforce the structure of your understanding, after you have finished the readings. The following recap is offered as another tool to provide structure. As will be evident, you need to put in some additional effort to turn this recap into a proper discussion of the topic. Note that you should be able to identify or define all terms in bold italics . Topic 2 — Bank Regulation and Capital Management According to Paul McCulley: [T]he essence of banking is maturity, liquidity and quality transformation: holding assets that are longer, less liquid and of lower quality than the funding liabilities. Transformation is where banks make their money, and transformation entails risk. Thus the tension that underlies international banking: The banks are trying to ramp up risk, while the regulators are trying to keep the risk in check. Basel Committee on Banking Supervision [Who Are These Guys?] The Basel Committee on Banking Supervision (BCBS) was born of crisis, the one triggered in 1974 by the failure of the Herrstatt Bank. That crisis illustrated the interconnectedness of banks, and regulators saw that it was in their best interests to make a global effort to enact “standards governing … international banks”. [BTW, what happened AFTER the Herrstatt Bank failed? What was the cost?] The BCBS made capital their focus. The central banks, as lenders of last resort, were the owners of the liquidity issue. Capital is more a solvency issue: Are the bank’s assets — risky as they are — sufficient to repay the bank’s liabilities (deposits included)? In this regard, capital is the cushion — the shock absorber — that keeps depositors safe. So is the shock absorber big enough? Well, it depends on how heavy the load (how much risk the bank is carrying) and how rough the road (how risky the times are). Basel Capital Accord
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This note was uploaded on 09/19/2011 for the course FINS 3650 taught by Professor Arnold during the Three '11 term at University of New South Wales.

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FINS T02A Recap - FINS 5550 / FINS 3650 International...

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