Thursday, May 14, 2009

article clearly shows that the Fed was aware of regulatory capital arbitrage (RCA)and it paints a largely sympathetic picture of the phenomenon

From The Baseline Scenario:

"New Forms of Internet Communication

with 3 comments

Arnold Kling has developed a new form of communication across the Internet: he wrote a blog post entitled “Paging Simon Johnson and James Kwak,” pointing to a 2000 paper by a Federal Reserve economist on the usage of securitization and off-balance sheet entities to effectively lower banks’ capital requirements for the same level of asset exposure. According to Kling, “the article clearly shows that the Fed was aware of regulatory capital arbitrage (RCA)and it paints a largely sympathetic picture of the phenomenon.”

I haven’t sprung for the $31.50 to download the full article yet, but it is going on my reading list.

Kling also said he is “researching the history of capital regulation,” which is something I would also look forward to reading.

Update: One of my friends pointed out that my university has online access to lots of journals, including the one this paper was published in, so I now have a copy.

By James Kwak

Written by James Kwak

May 14, 2009 at 6:15 pm"

Me:

I think that this is the same thing, more or less:

http://www.defaultrisk.com/pp_super_15.htm

Is there any doubt that lower capital standards are the main reason for CDSs and CDOs on a large scale? I thought that it was understood that the need was to get around capital requirements, and CDSs and CDOs happened to fit the bill. I’m talking here about the sellers. The buyers are another matter.

There were also extra fees and slicing advantages as well, of course.

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