RBA calls for rules to curb leverage in global banking August 31, 2010 - 9:13AM
Regulations to restrain leverage in the global financial system will be needed to lessen the risk of another financial crisis, Reserve Bank of Australia assistant governor Guy Debelle says.
Mr Debelle in a speech today also said that central banks and governments would have to remain as lenders of last resort when the financial system as a whole is under pressure.
Mr Debelle, who heads the RBA's financial markets division, said rules currently being thrashed out in the Basel reforms were aimed at limiting the leverage of financial institutions, while providing a more robust funding structure and enhancing their capital buffers.
"Leverage played the major role in translating events which would have been somewhat damaging, but survivable, into events which were fatal," said Mr Debelle.
"But in terms of insurance of the system as a whole, at some point, it has to be provided by the public sector," said Mr Debelle in a speech on risk and uncertainty.
"It would be excessively costly for the financial sector to hold enough capital and liquidity to enable it to survive a freezing of capital markets of the type that occurred in 2008."
Financial services were too important to the economy for the government not to come to the rescue, even if this was unpopular with tax payers.
Mr Debelle said the misassessment of risk was a key element of the financial crisis, with institutions relying too much on models that did not take enough account of uncertainty.
Devising models to account for uncertainty was inherently difficult, he added, so a "healthy dose of judgement" was also essential.
Reuters
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