Comments on: How To Destroy the British Banking System –- Regulatory Arbitrage via ‘Pig on Pork’ Derivatives. http://www.cobdencentre.org/2010/01/how-to-destroy-the-british-banking-system/ For honest money and social progress Wed, 08 Feb 2012 22:17:37 +0000 hourly 1 http://wordpress.org/?v=3.0.1 By: Tony http://www.cobdencentre.org/2010/01/how-to-destroy-the-british-banking-system/comment-page-1/#comment-25142 Tony Wed, 16 Mar 2011 16:25:06 +0000 http://www.cobdencentre.org/?p=1302#comment-25142 Gordon I sort of follow the scheme but not sure I would judge it costless nor is it relevant today. The rules about capital I assume you are referring to are the Basle agreement from 1996. This required a bank to put capital against assets based on the value and type, corporate assets had to have capital placed against 100% of the value, bank assets 20%, and government 0%. Therefore in the case you give the amount of capital required would be defined by the guarantor. I believe, but cannot confirm, when the rules where introduced the lower capital requirement only applied to banks. From that I see if a Bank wrote you a CDS on the guarantor you could now argue this was a bank risk and you need only put collateral up against 20% of the value. However, the 20% restriction was changed shortly afterwards, no date I am afraid, and then applied to all financial institutions, so you would have had the 20% applied then anyway. You then suggest the Bank having written the CDS matched this with a CDS with the US insurance company on, I assume, the default of underlying risk of the securities. The US insurer could not guarantee its own performance! The Bank is then short a CDS on the failure of the US Insurer and long the CDS on the underlying. This is not a perfect hedge and if the underlying fail and the US Insurer then fails they would suffer a loss. These are essentially two option and since they do not match and time value is so important in option pricing I would have expected some cost. To move on as you will be aware the Basle rules where amended so the scheme would not have worked and the in Basle 2 the arbitrary percentages where completely abandoned. Gordon

I sort of follow the scheme but not sure I would judge it costless nor is it relevant today.

The rules about capital I assume you are referring to are the Basle agreement from 1996. This required a bank to put capital against assets based on the value and type, corporate assets had to have capital placed against 100% of the value, bank assets 20%, and government 0%.

Therefore in the case you give the amount of capital required would be defined by the guarantor. I believe, but cannot confirm, when the rules where introduced the lower capital requirement only applied to banks. From that I see if a Bank wrote you a CDS on the guarantor you could now argue this was a bank risk and you need only put collateral up against 20% of the value. However, the 20% restriction was changed shortly afterwards, no date I am afraid, and then applied to all financial institutions, so you would have had the 20% applied then anyway.

You then suggest the Bank having written the CDS matched this with a CDS with the US insurance company on, I assume, the default of underlying risk of the securities. The US insurer could not guarantee its own performance!

The Bank is then short a CDS on the failure of the US Insurer and long the CDS on the underlying. This is not a perfect hedge and if the underlying fail and the US Insurer then fails they would suffer a loss. These are essentially two option and since they do not match and time value is so important in option pricing I would have expected some cost.

To move on as you will be aware the Basle rules where amended so the scheme would not have worked and the in Basle 2 the arbitrary percentages where completely abandoned.

]]> By: Duncan Hughes http://www.cobdencentre.org/2010/01/how-to-destroy-the-british-banking-system/comment-page-1/#comment-161 Duncan Hughes Tue, 27 Oct 2009 23:42:35 +0000 http://www.cobdencentre.org/?p=1302#comment-161 Highlights the latent systemic risks that still prevail in the system extremely well. Much of the perceived fabric of the global banking system, particularly in the form of the monolines and the rating agencies, is in tatters, and it can no longer be relied upon. Radical and conservative reform is clearly urgently required. Highlights the latent systemic risks that still prevail in the system extremely well. Much of the perceived fabric of the global banking system, particularly in the form of the monolines and the rating agencies, is in tatters, and it can no longer be relied upon. Radical and conservative reform is clearly urgently required.

]]> By: Chris Neal http://www.cobdencentre.org/2010/01/how-to-destroy-the-british-banking-system/comment-page-1/#comment-142 Chris Neal Fri, 23 Oct 2009 23:24:44 +0000 http://www.cobdencentre.org/?p=1302#comment-142 A fascinating amd incisive treatise Gordon thanks. This rams home the argument for updated Glass Steagall legislation and convinces me that 100% deposit cover banking should be available preferably delivered via a mutual framework. A fascinating amd incisive treatise Gordon thanks.
This rams home the argument for updated Glass Steagall legislation and convinces me that 100% deposit cover banking should be available preferably delivered via a mutual framework.

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