10 February 2009

McCreevy calls for overall cap on leverage

We need an overall cap on leverage on bank balance sheets regardless of risk asset weightings or value at risk measurements, he said and also announced much tougher capital requirements for trading book exposures.

Accounting standards have exacerbated the markets' recent problems because of rules that are "pro-cyclical", McCreevy said. “When market liquidity becomes tight as of now - sales decisions and valuations based on the so-called 'mark-to-market value' reinforce the downward spiral”, he explained. “That is why I recently brought forward a measure to provide firms with more flexibility on the mark to market requirements and to facilitate asset transfer from the trading to the banking book.”

 

Ideally, we should get international agreement on such a revised regime (that introduces significant counter-cyclicality, requiring banks to build up more substantial buffers) and I will be pushing for it, McCreevy said.

 

However, he also underlined that is not convinced that capital requirements on trading books should be materially lower than for those on banking books, he said and announced to bring forward, in due course, “much tougher capital requirements for trading book exposures”.

 

As to value-at-risk models, suffice to say that we now have inconvertible evidence they are very useful when they don't matter and totally useless when they do matter, the Commissioner said.

 

“I am convinced that we need an overall cap on leverage on bank balance sheets regardless of risk asset weightings or value at risk measurements, he told the conference. “A leverage of more than 30-to-1 will be a thing of the past in any revised framework that I approve.”

 

For the future, McCreevy called to regulate financial markets and underlined the need to increase work on accounting standards, including more work on Credit Default Swaps to strengthen market infrastructure.

 

We need adequate oversight and crisis management, he said and announced a paper on “Early Intervention” coming out with the de Larosière report end of this month.

 

“What we do not need is to become captive to those with the biggest lobby budgets or the most persuasive lobbyists”, he warned. “We need to remember that it was many of those same lobbyists who in the past managed to convince legislators to insert clauses and provisions that contributed so much to the lax standards and mass excesses that have created the systemic risks”, he underlined and also warned against a “classic beggar thy neighbour approach” of the national rescue measures.

 

Full speech

 

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