By Steven K. Beckner
JACKSON HOLE, Wyo. (MNI) ? Agustin Carstens, governor of the Bank
of Mexico, said Saturday that the economic experience of his country
since the ?peso crisis? of the mid-1990s suggests that the United States
is likely in for a long period of slow growth.
Carstens, commenting during a session of the Kansas City Federal
Reserve Bank?s annual Jackson Hole symposium, said his country?s
financial crisis has had lingering economic aftereffects and predicted
the U.S. financial crisis is apt to have a similar impact on the U.S.
economy.
?It takes a long time to digest a financial crisis,? said Carstens.
Carstens comments came during discussion of a paper by Brown
University Professor Ross Levine, who contended that post-crisis changes
in banking regulation and capital standards could backfire.
Former Federal Reserve Governor Randall Kroszner supported Levine?s
findings, likening the raft of new regulations and restrictions adopted
since the crisis to the Maginot Line ? the defensive wall built by
France between the two world wars which failed to protect that country
from Germany?s blitzkrieg invasion through the Ardennes in 1940.
Krozner, now a University of Chicago professor, said the U.S. and
other Group of 20 nations are ?fighting the last war.?
He said ?more and better quality capital? is needed, but said
then-chairman of the Federal Deposit Corporation Sheila Bair?s comment
that ?more is better? in terms of bank capital is ?not the way to look
at it.?
?There is too much emphasis put on capital regulation as a
cure-all,? said Kroszner. ?We do need more and higher quality capital,
but we have to be humble about getting capital regulation right.?
He called the so-called Basel international risk-based capital
standards ?arbitrary.?
Levine, in his paper, had warned that the new standards could have
unintended adverse consequences. ?Tightening capital regulations will
not necessarily improve the asset allocation decisions of banks and
promote economic growth.?
?While many analysts look to capital regulations as a sort of
policy panacea for all that ails banks, research suggests that the
impact of increasing capital requirements will differ across countries
with different nonbanks and securities markets and across banks with
different ownership and corporate governance structures,? Levine said.
?Although the direct effect of more capital is the creation of a
larger ?cushion? against adverse shocks, an indirect effect could induce
insiders to increase overall bank risk,? he continued. ?Since more
stringent capital regulations hurts insiders by reducing profits, they
might respond by increasing bank risk to compensate for this policy
change.?
?To the extent that more stringent capital regulations induce banks
to shift out of making investments in new and growing corporations and
into government securities, and no other sources of capital substitute
for this reallocation, these regulations will have clear implications
for the emergence of new firms and expansion of old ones,? Levine also
warned.
?While the direct effect of more capital is the creation of a
larger ?cushion? that reduces the riskiness of the bank, an indirect
effect could induce bank decision makers to increase the riskiness of
other assets such that overall riskiness could rise,? he continued.
?More stringent capital regulations tend to hurt equity claimants by
reducing their profits,? he went on. ?Consequently, more stringent
capital regulations can incentivize equity claimants to push the bank to
increase risk taking as compensation for this adverse change.?
JP Morgan Chase Chairman Jacob Frenkel, former governor of the Bank
of Israel, said the financial crisis was not a result of inadequate
regulation, but from the failure of supervisors to enforce the
prevailing regulations.
Agreeing with Frenkel, Levine said it was not that there was ?not
enough regulatory power, but there was an unwillingness to use that
power.?
Levine also expressed wariness of the increased authority granted
to the Federal Reserve by the Dodd-Frank legislation to oversee
?systemically important? financial institutions.
?If you grant an enormous amount of power to an agency such as the
Fed independent of the political and financial system to monitor what?s
going on in that agency it can create very dangerous circumstances,?
he said. ?Simply relying on the angelic intentions of the officials is
not a system ? it?s a hope.?
** Market News International **
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