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Reflections by an
economist on the lessons
from the crisis for capital
adequacy and accounting
principles
Jesper Berg - 2009
1. A buffer for bad years
” Now Joseph was thirty years old when he came before Pharaoh, king of
Egypt. And Joseph went out from before the face of Pharaoh and went
through all the land of Egypt. Now in the seven good years the earth gave
fruit in masses. And Joseph got together all the food of those seven years,
and made a store of food in the towns: the produce of the fields round every
town was stored up in the town. So he got together a store of grain like the
sand of the sea; so great a store that after a time he gave up measuring it,
for it might not be measured..”
Source: Old Testament Gênesis 41.
2. Outline
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Turner and de Larosiere
From Modigliani and Miller and onwards
Four lessons to be remembered
Procyclicality, liquidity and the liability side
3. Policy messages
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Capital requirements up
Shift relative taxation
Assets at mark-to-market/Fair value
Liabilities at Max (Nominal value, mark-tomarket)
Alternative valuations in notes
Transparent cyclical buffers
Tightening implemented in years of plenty
4. Turner and de Larosiere
5. Do the MM-Proposition apply to
banks
”Yes and no”
Source: M. Miller, J. of Banking and Finance, 1995.
6. The difference between going
and gone
Selected items from failed banks, mill. kr.
EBH Bank
1. half
2009
Writedowns
Result
2008
1105
-1470
Loans
outstanding
3349
Own Funds
1476
Source: Finansiel Stabilitet
FIONIA
-2200
-1300
Roskilde Bank
1. half 2009
1. half 2009
2. half 2008
1945
1362
3503
-1901
-1115
-3501
17000
17839
20457
-79
2857
-1028
7. Years of plenty and years of
famine
LOAN LOSS PROVISIONS, PER CENT OF LOANS
Denmark
Sw eden
Norw ay
Finland
3.1
2.5
1.5
1.5
0.6
1.1
2.0
1.6
2.3
2.7
3.3
3.2
0.5
0.5
0.7
0.5
0.6
0.5
0.3
0.4
1.2
4.0
7.6
6.3
0.2
0.3
0.3
0.4
0.5
1.3
2.0
2.6
2.3
4.3
2.5
1.6
0.6
0.5
0.5
0.6
0.6
0.7
0.7
0.7
0.6
1.7
5.8
5.6
Average 1982-90 ............................................ 1.8
Average 1982-93 ............................................ 2.1
0.6
1.9
1.1
1.5
0.6
1.5
1982
1993
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
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8. SIV and conduits or the danger of a liquidity guarantee
Assets
ABCP
Liabilities
Assets
Shares
Liabilities
Home loans
Money Market
Mutual Fund
ABCP
ABCP
SIV/Conduit
Liquidity guaranty
OK!
Ratings Agency
Bank
OK!
(non-balance sheet)
9. The game is skewed
HOW OFTEN IS SIV AND CONDUITS M ENTIONED IN FINANCIAL STABILITY REPORTS
Financial Stability Report
SIV
Conduit
IM F spring 2007 ..............................................
IM F aut umn 2007 ...........................................
0
26
0
30
ECB spring 2007 ............................................
ECB aut umn 2007 ...........................................
0
28
0
26
Bank of England spring 2007 .......................
Bank of England aut umn 2007 .....................
0
33
0
21
BIS annual report spring 2007 ......................
BIS annual report spring 2008 ......................
0
5
0
3
Source: Financial St abilit y Report s.
10. The ostrich strategy
People and governments have never
learned anything from history, or acted on
principles deduced from it .
Source: Hegel, as quoted in
"History of the 80s, vol. I,
An examination of the
banking crisis of the 1980s
and early 1990s",
Federal Deposit Insurance
Corporation, 1997.
11. Procyclicality, liquidity and
liability side
the
”The large bike blade”.
Source: Expressions used when Bjarne Riis during the Tour de France in 1996 gave
his competitors rear by running a high gear up the hill. Bjarne Riis has subsequently
indicated that he was drugged.
12. Policy messages







Capital requirements up
Shift relative taxation
Assets at mark-to-market/Fair value
Liabilities at Max (Nominal value, mark-tomarket)
Alternative valuations in notes
Transparent cyclical buffers
Tightening implemented in years of plenty
13. Concluding observation
To understand the world is like peeling an onion. Each time, removing
a layer, you discover a new layer and occasionally you weep.
Source: An analyst philosophy of life.