Page 21 - Monocle Quarterly Journal Vol 1 Issue 1 Q4

the ARt of fAIluRe: pRedIctING fINANcIAl dIStReSS pRe-cRISIS
In essence, if one is to boil down the BCBS regulations, ex-post their imposition on the banking system, they e ectively achieve three things. Firstly, they almost double the amount of core Tier-1 equity capital that needs to be held against the risk-weighted asset loan book of a bank. Secondly they increase the standard of that capital to be limited to only the purest of capital, i.e. unencumbered equity, excluding instruments that are pseudo-capital in nature. irdly the regulations introduce liquidity ratios with which banks must now comply. Speci cally, the two critical ratios are the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) which have been constructed by the BCBS to address the ultimate cause of failure in the majority of banks that did fail.
Liquidity Shortfalls as the Real Cause of Banking Failure
To be clear, whilst most banks during the crisis experienced severe pressure on their loan books and the value of their assets, leading them to substantially increase provisions to absorb forthcoming losses, their failure as institutions was primarily owing to an inability to meet immediate liability demands.
In fact, it is technically incorrect to say that banks failed from a Credit Crisis since most of the credit losses were experienced by these banks as revaluations of their asset book rather than actual experienced losses. e e ect of the Credit Crisis, and the extreme devaluation of MBSs and CDOs, lead market participants in the interbank market, i.e. banks themselves, to cull from their own. We witnessed during the crisis the severe e ects of banks hoarding cash, and an unwillingness of these same banks to take collateral from counterparty banks of anything that was of less than the highest quality. is meant that all MBS and CDO paper, even if it was triple A-rated, was not accepted by banks as collateral in repo- style transactions. is led particular banks to experience severe short term liquidity shortfalls, which in turn led in some cases to extreme government intervention and in other cases to failure.
e Monocle Pre-Crisis Fundamental Analysis
At the outset of this study, it was our supposition that banks that were more reliant in their liability structure on the interbank market prior to the crisis, would have been those banks that would have been more likely to have failed. Several problems present themselves in attempting to
“In fact, it is technically incorrect to say that banks failed from a Credit Crisis since most of the credit losses were experienced by these banks as revaluations of their asset book rather than actual experienced losses.”
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