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Politics, Regulations and 'The Simple Solution'.

The mainstream media has been discussing this week, the new instructions to the Financial Services Authority from the UK's chancellor of the exchequer Alistair Darling. All of a sudden the goverment and the regulator should now be concered with systemic risk and Darling has issued some changes to the FSA operating proceedures.

But this paragraph from the Financial Times article caught my eye.

"In a change to current practice, the FSA will also impose heavier capital and liquidity standards on banks that pose the greatest risk to the financial system. The chancellor said that in future, the capital ratios that banks must hold will not only be based on the possibility that an individual bank will fail, but the costs of that failure on the financial system and the economy."

My first question is: How is that capital charge going to be worked out?

Many us remember the long drawn out debates over Basel II and working out a capital charge using market, credit and operational risk factors. By all means add in systemic risk to the number puzzle, it sounds great on paper--but how and who is going to manage that debate?

Now I am not infavour of lax regulatory surpervision (I think we are all living through the consequences of that), but I am wary of regulatory regimes that seem more about scoring political points that dealing with the reality of the financial industry.

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