[OPE] Five trillion dollars in the accounts of the banks... now you see it, now you don't

From: Jurriaan Bendien (adsl675281@tiscali.nl)
Date: Wed Jun 04 2008 - 15:04:58 EDT

Banks fear new $5,000bn balance burden

By Paul J Davies and Gillian Tett in Cannes and Jennifer Hughes in London
Published: Financial Times June 3 2008 

Accounting changes could force US banks to take thousands of billions of dollars back on to their balance sheets in the coming months in a move that is likely to curb further their lending and could push them into new capital raisings, analysts have warned. Analysts at Citigroup said a planned tightening of the rules regarding off-balance sheet vehicles would force banks to reconsider arrangements and could result in up to $5,000bn of assets coming back on to the books. The off-balance sheet vehicles have been used by financial institutions to keep some assets off their balance sheets, thereby avoiding the need to hold regulatory capital against them. Birgit Specht, head of securitisation analysis at Citigroup, said: "We think it is very likely that these vehicles will come back on balance sheet. "This will not affect liquidity because [they] are funded, but it will affect debt-to-equity ratios [at banks] and so significantly impact banks' ability to lend." Ms Specht told a seminar at a conference on asset-backed securities in Cannes that the uncertainty about what might change was making banks uneasy about their investments. "Banks are not investing [in assets] right now because of funding issues and regulatory uncertainty." The comments come as regulators and central bankers are intensifying behind-the-scenes discussions about the shape of the financial architecture in response to the credit turmoil.

Complete article: http://www.ft.com/cms/s/0/db943d88-3196-11dd-b77c-0000779fd2ac.html

This is just to say that how assets and liabilities are valued is often due only to the bookkeeping technique used, and that this might make a truly gigantic quantitative difference. It's not that the assets to quell the credit problems do not exist, but the disposition of those assets obviously matters a great deal to how the problems can be solved. Market logic would suggest that to avoid any dubious financial products, they ought simply to be made much more costly, so that they are effectively "priced out of the market". The question however is whether  a new round of "financial innovation" in response to such regulatory measures, which would dodge those measures in a new way, could ultimately be prevented. I'm not holding my breath...  


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