Auditors are in a difficult position in these post-Enron days, with the demise of Arthur Andersen on everyone’s mind. If they refuse to rubber-stamp the banks’ fictitious valuations, the banks will collapse, but if the auditors allow the fiction, they run the risk of being severely punished for malfeasance.

So Peter Spencer of Ernst & Young’s Item Club argues that the British “government must suspend a set of key banking regulations at the heart of the current financial crisis, or risk seeing the economy spiral towards a future that could ‘make 1929 look like a walk in the park’.”

The regulations mean that banks forced to take off-balance sheet assets from troubled structured investment vehicles on to their books had little choice but either to raise money from abroad or cut back dramatically on their spending, he said.

Spencer tries to blunt the clear meaning of his statement, by claiming that the banks are refusing to lend to each other, not because they are insolvent, but rather that they are being prevented from lending to each other because the regulations are overly restrictive. The regulations he blames are the capital requirements set by the international Basel agreements, which require the banks to have an 8 percent capital reserve, which Spencer said should be cut to about 6 percent.

He dismissed as “window dressing” the move announced by central banks around the world this week to pump extra money into the money markets and increase the type of collateral they will accept in return, in an effort to get them running again.

“This won’t get to the core of the problem: the fundamental lack of collateral. As these problems drag on, the consequences for the macro-economy of not relaxing [the Basel regulations] are unthinkable.”

In reality, its absurd to suggest that a mere 2 percent reduction in capital requirements would head off a crisis that would make 1929 look like a “walk in the park.” What the auditors are really saying is that, as the rules are currently constituted, the banks are already insolvent, and that the capital requirements must be lowered so that the auditors can certify their books for one more year.

Tags: Bank Insolvency, Basel Regulations, Economy, Finance, SIV

This entry was posted on Sunday, December 16th, 2007 at 6:36 pm and is filed under Economy, Finance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.