The causal factors in Distress Banks

Paradigm change to perception of LOLR

In my opinion one important causal factor for banking crisis is a paradigm change to the perception of Sovereign 'Lender-Of-Last-Resort' (LOLR)?

The LOLR paradigm has caused imminent crisis to the Eurozone banking and may soon spread to other countries.

Impact on Sovereign debt

The stimulus package as a response to the financial crisis of 2007-09, was effectively a system of guarantees by Sovereign States. This package effectively saw liquidity and confidence return in 2010, even stock markets returning to pre crisis levels. Government guarantees may have been modeled as risk less. Provided it doesn't affect their credit rating. In the case of a fall of credit rating the Sovereign, currency may be devalued or Quantitative Easing which is beneficial for the debtor-Sovereign (reduction of market value of the debt) but a nightmare for the creditor-investors. This also makes the exports of the Sovereign more competitive, which can stimulate growth and a major factor to solve its problems.In the case of PIGS in the Eurozone this tool was not available since they all held the same currency.

The above solution is largely theoretical where the above situation only creates more systemic risk to the global financial markets. I believe there needs to be a multilateral system of LOLR, either regional (say ECB) or global which can guarantee Sovereign credit default risk and determined / priced regularly (index-linked or CDS) in global markets. The same can be created under a leveraged fund like structure which can be a Public-Private participation, corporatized in an SPV.

Impact on banking system

My point is that Sovereign LOLR created a system of lowering credit cost across the whole system of credit creation. Sandra Krieger mentions in the context of maturity transformation that credit cost needed to realistically priced. http://www.ny.frb.org/newsevents/speeches/2011/kri110308.html

I believe that banking crisis can be avoided in the future by some sort of regulatory intervention, by keeping credit cost at equilibrium level not artificially brought down by Sovereign LOLR.

Another crticism: Re-capitalization which is seen as the tool of making banks stronger, has not taken into account systemic impacts to capital markets like stock/debt markets if banks write-off massive losses against capital.

Solution proposed

1. Multi-lateral and market determined system of Sovereign LOLR

2. Accurately pricing credit cost by regulatory intervention

3. Banking credit should be a cost plus after taking into account Sovereign LOLR

Multilateral system of Sovereign LOLR

Each Sovereign LOLR can be structured as a leveraged fund like structure which can be a Public-Private participation, corporatized in an SPV.

A parallel can be drawn to a corporation which can be dissolved in the event it becomes insolvent, where good businesses can be carved out from the bad businesses. Sovereign technically may not be insolvent, hence an carve out of Sovereign weakness can be structured, may be in a corporate structure or bankruptcy remote SPVs. The most important part of this mechanism is that the SPV should be global or transnational so enforcement would not be isolated within the defaulting country.

Alternatively the multilateral system of guarantee can be macro monitored at the guarantor (regional/global) level. This would be the more appr

Problems – Problems and solutions in India

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Samuel George November 25, 2011 13:24

Paradigm change to perception of LOLR

In my opinion one important causal factor for banking crisis is a paradigm change to the perception of Sovereign 'Lender-Of-Last-Resort' (LOLR)?

The LOLR paradigm has caused imminent crisis to the Eurozone banking and may soon spread to other countries.

Impact on Sovereign debt

The stimulus package as a response to the financial crisis of 2007-09, was effectively a system of guarantees by Sovereign States. This package effectively saw liquidity and confidence return in 2010, even stock markets returning to pre crisis levels. Government guarantees may have been modeled as risk less. Provided it doesn't affect their credit rating. In the case of a fall of credit rating the Sovereign, currency may be devalued or Quantitative Easing which is beneficial for the debtor-Sovereign (reduction of market value of the debt) but a nightmare for the creditor-investors. This also makes the exports of the Sovereign more competitive, which can stimulate growth and a major factor to solve its problems.In the case of PIGS in the Eurozone this tool was not available since they all held the same currency.

The above solution is largely theoretical where the above situation only creates more systemic risk to the global financial markets. I believe there needs to be a multilateral system of LOLR, either regional (say ECB) or global which can guarantee Sovereign credit default risk and determined / priced regularly (index-linked or CDS) in global markets. The same can be created under a leveraged fund like structure which can be a Public-Private participation, corporatized in an SPV.

Impact on banking system

My point is that Sovereign LOLR created a system of lowering credit cost across the whole system of credit creation. Sandra Krieger mentions in the context of maturity transformation that credit cost needed to realistically priced. http://www.ny.frb.org/newsevents/speeches/2011/kri110308.html

I believe that banking crisis can be avoided in the future by some sort of regulatory intervention, by keeping credit cost at equilibrium level not artificially brought down by Sovereign LOLR.

Another crticism: Re-capitalization which is seen as the tool of making banks stronger, has not taken into account systemic impacts to capital markets like stock/debt markets if banks write-off massive losses against capital.

Solution proposed

1. Multi-lateral and market determined system of Sovereign LOLR

2. Accurately pricing credit cost by regulatory intervention

3. Banking credit should be a cost plus after taking into account Sovereign LOLR

Multilateral system of Sovereign LOLR

Each Sovereign LOLR can be structured as a leveraged fund like structure which can be a Public-Private participation, corporatized in an SPV.

A parallel can be drawn to a corporation which can be dissolved in the event it becomes insolvent, where good businesses can be carved out from the bad businesses. Sovereign technically may not be insolvent, hence an carve out of Sovereign weakness can be structured, may be in a corporate structure or bankruptcy remote SPVs. The most important part of this mechanism is that the SPV should be global or transnational so enforcement would not be isolated within the defaulting country.

Alternatively the multilateral system of guarantee can be macro monitored at the guarantor (regional/global) level. This would be the more appr

Problems – Problems and solutions in India

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