Global banks 'vulnerable to adverse shocks'
A study led in part by US economist Larry Summers questions the effectiveness of much recent global policy activism on bank regulation."To our surprise, we find that financial market information provides little support for the view that major institutions are significantly safer than they were before the crisis and some support for the notion that risks have actually increased," Summers and Natasha Sarin conclude in a paper published over the weekend by the Brookings Institution.National Australia Bank, ANZ and Westpac featured in a data set of global banks outside China considered by Sarin and Summers. The conclude that their work looking at measures such as share price volatility and spreads on credit default swaps "tends to support the idea that franchise value in a financial system is stabilising and to confirm the idea that substantial losses in franchise value can be destabilising."Sarin and Summers write that "since the financial crisis, there have been major changes in the regulation of large financial institutions directed at reducing their risk. "Measures of regulatory capital have substantially increased; leverage ratios have been reduced; and stress testing has sought to further assure safety by raising levels of capital and reducing risk taking."Standard financial theories would predict that such changes would lead to substantial declines in financial market measures of risk," they write, before going on to reach "surprising" findings."We believe that our findings are most consistent with a dramatic decline in the franchise value of major financial institutions, caused at least in part by new regulations. "This decline in franchise value makes financial institutions more vulnerable to adverse shocks."